When buying a home, most people focus on saving up for the down payment, but there’s another important cost you’ll need to account for: closing costs. These are the expenses you’ll need to pay on closing day, in addition to your down payment, in order to finalize the purchase of your home. From appraisal fees to attorney costs, closing costs can quickly add up — and as a first-time homebuyer, they may catch you by surprise.
In this blog, we’ll break down everything you need to know about closing costs, including how much you can expect to pay, who is responsible for these fees, and some tips for reducing the amount you’ll need to pay at the closing table.
What Are Closing Costs?
Closing costs are the various fees and expenses involved in finalizing the sale of a home. These costs cover everything from the appraisal of your property to title searches, attorney fees, and other administrative charges tied to securing your mortgage. The exact closing costs you’ll incur depend on the type of mortgage loan you’ve chosen and your location.
How Much Are Closing Costs?
On average, closing costs typically range from 3% to 6% of your loan amount. So, for a $200,000 mortgage, you might expect closing costs between $6,000 to $12,000. These costs are separate from your down payment, and while you can’t avoid them, there are ways to reduce their impact on your budget.
Who Pays Closing Costs?
Both the buyer and the seller pay closing costs, but as the buyer, you’ll usually cover the bulk of the fees. In some cases, you can negotiate with the seller to contribute to your closing costs, known as seller concessions. This can make the purchase more affordable, but there are limits on how much a seller can contribute, which vary based on the type of loan and your down payment.
For example:
- Conventional loans: If you make a down payment of less than 10%, the seller can contribute up to 3% of the loan amount.
- FHA loans: The seller can contribute up to 6% of the sale price.
- VA loans: The seller can contribute up to 4% for certain fees, like appraisals and property taxes.
In a competitive market, however, the seller might not be willing to offer concessions, so it’s important to understand the limits before making requests.
What’s Included in Closing Costs?
Closing costs can vary depending on the lender, loan type, and location, but here are some of the most common costs you’ll see on your closing disclosure:
- Appraisal Fee: A third-party appraiser evaluates your home’s value to ensure it aligns with the loan amount. Fees typically range from $300 to $600.
- Attorney Fees: In some states, you’ll need an attorney to help with the legal aspects of the sale. This fee varies by state.
- Title Search & Title Insurance: A title search checks for any claims or liens against the property, and title insurance protects you and your lender from future claims. Expect to pay between $300 and $1,000 for these services.
- Home Inspection Fees: Depending on the loan, you may need to pay for an inspection to ensure the home is in good condition. This can cost around $300 to $500.
- Closing Fee: This fee is typically paid to the escrow company or attorney handling your closing. It can vary depending on your location.
- Escrow Fees: These funds are held in an escrow account to cover future expenses like property taxes and homeowners insurance. Your lender may require you to prepay a few months’ worth of these costs at closing.
How Can You Reduce Closing Costs?
While you can’t avoid closing costs entirely, there are ways to minimize them:
- Shop Around for Lenders: Not all lenders charge the same fees. Take the time to compare offers from different mortgage companies to find the best deal.
- Ask the Seller for Concessions: In a buyer’s market, sellers may be more willing to contribute toward your closing costs to help you close the deal faster.
- Consider a No-Closing-Cost Mortgage: Some lenders offer mortgages where you can roll your closing costs into your loan. While this can reduce your upfront expenses, keep in mind that it will increase your loan balance and interest payments over time.
- Negotiate Fees: Some fees, like application fees or processing fees, may be negotiable. Ask your lender if they’re willing to reduce or waive certain charges.
Closing Cost FAQ
How can I estimate my closing costs? On average, closing costs range from 3% to 6% of the loan amount. You can get a more precise estimate from your lender or use online calculators based on your home’s purchase price, loan type, and location.
When do I pay closing costs? Closing costs are typically paid on the day you close on your home. This is when the funds for your down payment and closing costs are transferred to the seller and the various service providers involved in the transaction.
Can I wrap my closing costs into my mortgage? Some lenders offer the option to include your closing costs in your loan, but this increases the total amount you borrow and the interest you’ll pay over the life of the loan. Consider whether paying upfront or negotiating seller concessions might be a better option for you.
The Bottom Line
Closing costs are a necessary part of the home buying process and typically amount to 3% to 6% of your loan balance. While they can be significant, understanding what to expect and exploring ways to reduce them can help make your home purchase more affordable. By working with a trusted lender, like those at Avantiway Financial, you can make informed decisions about your mortgage and ensure a smooth closing process.
At Avantiway Financial, we’re here to guide you through every step of your home purchase, from securing the right loan to helping you navigate closing costs. Reach out to us today to learn more about your mortgage options and get started on your home buying journey!
Would you like more guidance on how to estimate your closing costs or tips for preparing financially for closing day? Let us know in the comments!