What is it:
Closing costs are the costs and fees charged to complete a real estate transaction. As the name might imply, the fees are due at closing, which is the finish line of a real estate purchase where ownership changes hands. The buyer is usually responsible for paying closing costs, but depending on the sale the sellers might pay. If the buyer is responsible for payment, they should consider the closing costs a part of their home purchase price. Closing costs will vary from purchase to purchase, but planning for 2-5% will generally give the parties a good idea of what to expect at closing.
Closing costs will vary depending on:
- Location of property
- Purchase price
- Type of loan used to purchase the property
The types of fees considered closing costs will vary depending on the title company used to manage the purchase and could include (but are not limited to):
- Application fees
- Home appraisal
- Escrow fees
- FHA upfront mortgage insurance premium
- Title insurance
- Property taxes
- VA funding fee
Buyers can request lender-paid closing costs which allow closing costs to be rolled into the mortgage. This method takes the pressure off of the buyer to come to the table with a significant sum of money on top of a major purchase.
Normally a buyer will receive a notification three days before their closing date disclosing the full list of fees due at the signing. The fees are usually not finalized until then, but buyers can calculate the closing costs to determine if they would rather pay out of pocket or work with their lender to roll the fees into the mortgage.
As mentioned, fees will vary by location, type of loan used to purchase property, and the purchase price.
For example, a $250,000 house in Washington state would likely have the following fees according to Tim Lucas at My Mortgage Insider:
|Loan origination fee||$2,500 (1% of loan amount)|
|Discount fee||$625 (0.25%)|
|Homeowners insurance premium (first year)||$700|
|Property tax reserves (6 months)||$1,500|
|Estimated total||$7,985 (3.2% of the loan amount)|
This is a general guideline and certain fees may not apply for other purchases, while fees not itemized in this example will apply. The mortgage lender and title company representatives will generally have the most up-to-date information on which fees will be incurred during the purchase process.
The bottom line
Closing costs are fees due at the closing of a home purchase that can either be paid by a seller or buyer depending on the terms of the sale. The actual cost of closing costs varies depending on location, type of loan, and the purchase price of the property. The fees that comprise closing costs can include but are not limited to, escrow, appraisal, title insurance, underwriting, VA financing, and/or legal fees. Buyers should always budget in closing costs when shopping for a home. A good estimate guideline for budget purposes is to plan on paying approximately 3% to 5% of the purchase price.