What are closing costs?
Closing costs are fees and expenses you pay when you close on your house, beyond the down payment. These costs can run 3 to 5 percent of the loan amount and may include title insurance, attorney fees, appraisals, taxes and more. This guide can help you plan for closing costs, but be sure to talk to your mortgage lender about the specifics for your home purchase.
What makes up your closing costs?
- Loan origination fees. These include fees for processing and underwriting the loan. Underwriting is part of the loan approval process, when the lender checks to see if you’re able to repay your loan based on a variety of factors such as credit history. These fees vary and go to your lender.
- Appraisal and survey fees. The appraisal and survey are used to help confirm the fair market value of your home. Fees for these services may vary but are usually several hundreds of dollars.
- Title insurance. Policies for both the buyer and lender are calculated based on the purchase price.
- Homeowners insurance. The first year is generally paid at closing.
- Private mortgage insurance (PMI). If your down payment is less than 20 percent, you may need to pay private mortgage insurance (PMI), which protects the lender against losses if you cannot repay your loan.
- Mortgage points. Also known as discount points, mortgage points are paid directly to the lender at closing in exchange for a lower interest rate on your mortgage.
- Property tax. Usually, six months of advance tax is paid at closing. Taxes vary by location. Keep in mind: After the loan closes, the property may be reassessed and the value could increase along with the real estate tax. If the taxes are reassessed, then the amount the lender originally put aside in an escrow account may need to be readjusted to ensure there is enough to pay the new tax amount.
- Closing or escrow fee. This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home.
- Attorney fees. Some states require you to have an attorney. Their fees may be bundled into your closing costs.
- Miscellaneous fees. A number of smaller fees may also be included at closing, from the cost of a credit check to the cost of registering your purchase with the local government.
How to estimate your closing costs
Once you submit a mortgage application, your lender is required by law to give you a Loan Estimate (LE) within a few days. If you have questions or something doesn’t add up in your LE, ask your lender or attorney right away. You want to avoid surprises. Prior to closing your loan, you’ll receive your final Closing Disclosure listing your closing costs. Be sure to compare your Closing Disclosure to the LE you received when you applied for your loan. Once you’ve determined your closing costs, check with your closing agent about what type of payment is acceptable; generally, you’ll be asked to pay via cashier’s check.
Knowing what closing costs to expect can help better prepare you for the homebuying process. A closing costs calculator, like this one from Bank of America, can help you estimate the amount you’ll want to budget for.