Signing for a mortgage is the final step required before you’re given the keys to your new home, and that means it’s time to settle up closing costs—or the fees associated with a mortgage that typically amount to 2 percent to 5 percent of the loan principal.
While the various closing cost components vary from state to state, some closing-related items can be negotiated by a consumer. Closing costs include an appraisal, credit check, and title search, and when people refinance a mortgage or obtain a home equity loan or home equity line of credit, closing costs must be paid again. Here’s a breakdown of typical closing cost items and amounts.
How much are closing costs?
It depends on the price of the home, how tight the local market is, and the location. The average total for closing costs in the U.S. is $4,876, according to the real estate data firm ClosingCorp. A survey by the firm this past year determined that the highest closing costs were in the Northeast—including the District of Columbia ($12,573); New York ($9,341); Delaware ($8,663); Maryland ($7,211); and Vermont ($6,839). States with the lowest average costs in the survey included Missouri ($2,905); Indiana ($2,934); South Dakota ($2,996); Iowa ($3,138); and North Carolina ($3,206).
What are the fees associated with closing costs?
- Appraisal fee: This fee pays for a licensed professional to determine what the home is worth before a lender will extend a mortgage offer. Estimating the market value of a single-family home will typically range from $300 to $450 or more for a larger home.
- Credit report fee: The credit report fee is what the lender charges to check your credit score and obtain a credit report. The fee is $25 or more per individual borrower on the loan.
- Origination fee: Lenders sometimes charge a fee for initiating the loan. It can range up to about $125.
- Application fee: Some lenders charge a fee of several hundred dollars to process the application.
- Title search: If you’re buying anything other than a new property, lenders will send someone to search local property records for the title of the home to make sure there aren’t any issues with ownership or liens. The fee is around $450.
- Title insurance: Lenders require obtaining title insurance in case there are issues with ownership after the sale. This protects the lender and the cost is usually 0.50 percent to 1 percent of the loan amount. The homeowner may wish to purchase title insurance to protect their financial interest in the property and that’s an additional cost.
- Underwriting fee: This also can be called an administrative or processing fee, and it covers costs to evaluate and verify your mortgage. This might be around 0.5 percent of the loan amount.
How to avoid some of the closing costs
While you can’t avoid paying all of the closing costs, there are some that can be negotiated and that can potentially save you money. Many fees are not set in stone, and the lender has some latitude to adjust them. But you’ll need to ask about each one individually. If a fee isn’t clear, ask the lender what it covers specifically, and if it doesn’t make sense, ask for the fee to be waived.
Who pays closing costs?
Although most fees are traditionally paid by the buyer and a few by the seller, some can be negotiated depending upon the market. Many buyers typically believe that the only fee sellers ever pay is the realtor’s commission.
But savvy buyers can sometimes negotiate some of the other costs into the seller’s corner. It’s not unusual for buyers to persuade sellers to share some expenses that are paid in advance, including tax and insurance escrow deposits, flood and hazard insurance premiums, property taxes, and per-diem interest.
How to prepare for closing costs
One option is to consult a lender before you begin looking at homes to understand what all of the costs will be based on the type of property you’re buying. That’s why a mortgage preapproval is recommended. Since a number of factors—such as the type of loan, type of property, type of occupancy, and credit score—determine what the closing costs may be, try to be as specific as you can with your mortgage providers.
Budgeting for closing costs, in addition to the down payment, also is helpful. The key is to be patient and prepared since the home-buying process can be lengthy.
