Most homebuyers end up paying additional fees required at the end of the transaction called closing costs. Closing costs are due when transferring the title from a seller to a buyer and are necessary to close the deal. They can include charges for appraisals, prepaid property taxes, and loan origination fees.
Both buyers and sellers can be subject to closing costs, but buyers usually have more closing costs than sellers. Mortgage lenders must include these additional costs in their loan estimates.
First-time homeowners are rarely familiar with closing costs, so the price tag can be a bit of a surprise. The fees range anywhere from two to five percent of the purchase price, and the average homeowner pays $5,749 in closing costs when you include taxes. This varies depending on where you live and the type of home you purchase. At $25,800, the District of Columbia has the highest average closing cost if you include taxes. The lowest average with taxes is Indiana at $1,909.
Note, too, the percentage estimate for closing costs is based on the purchase price, not the loan value. Mortgage lenders don’t always cover the entire cost of your home, so these amounts are often different.
That said, some closing costs can be rolled into your loan. For example, let’s say you want to buy a $200,000 home using a $190,000 loan, and your closing costs are three percent of the purchase price. That means you’re going to pay $6,000 at closing. If your lender allows you to finance your mortgage closing costs, then your final loan amount is $196,000.
Adding your closing costs to your mortgage can seem like a good idea, but you should remember that you still have to pay the money back. Plus, you’ll have to pay interest on the money borrowed.
We’ve counted nearly 20 different types of closing costs that the typical homebuyer may run into, and grouped them by which aspect of the transaction they relate to. You should note, however, that this is not a complete list. Depending on your situation, you may see other mortgage closing costs.
Property-related fees are costs directly tied to buying the property. These will include:
Loan-related fees are costs associated with originating and closing the loan. They include:
Lenders may require you to get private mortgage insurance (PMI), especially if you put down less than 20 percent on your home, and it usually comes with some extra fees, such as:
This next group consists of fees you’ll most likely continue to pay as long as you own your home, but that you may be asked to pay upfront at closing, such as:
The following fees cover the costs lenders and escrow agents incur while making sure the house can be sold:
Your lender must disclose your mortgage closing costs with a loan estimate within three days of taking your application, according to the Real Estate Settlement Procedures Act . Additionally, your lenders must provide a final disclosure statement three days prior to closing indicating any potential changes to the costs.
Both the estimate and the final disclosure statement are important legal documents that you need to read closely. Not only does your signature indicate that you agree, but the information in these documents help you better budget for your new home.