If you’re buying a house, you will have to pay some money upfront as part of closing costs
Closing costs include a variety of fees as well as prepaid expenses, like property taxes
You can try to avoid some closing fees by negotiating with the lender or seller
First-time homebuyers may be surprised to learn that when they take out a mortgage, there’s still a large amount of money to pay upfront besides the mortgage itself. In addition to the down payment, when you buy a home you're also required to pay closing costs, which include all the fees you’ve incurred throughout the mortgage process.
Some closing costs are related directly to the lender, like fees for when they pulled your credit report. Other closing costs are third-party fees, like when you had the home inspected or appraised. Another component of closing costs are simply other costs of homeownership, like taxes and insurance premiums. Government-backed loans, like FHA loans, may have slightly different closing cost fees.
You can find the closing costs in your loan estimate as well as the closing disclosure. The average closing costs range from 2% to 5% of the home sale price. That’s a significant amount of money, which is why you should make sure you have enough savings before you start looking for a house. While you won’t be able to avoid paying closing costs entirely, you may be able to minimize them.
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Closing costs vary by state. Here is a list of the most common fees that are part of mortgage closing costs for conventional loans:
The lender needs to know your home’s fair market value to make sure they’re extending you an appropriate loan amount. The fees for a professional appraiser are typically a few hundred dollars.
This cost is determined by the lender for processing your loan application. The application fee might include a fee for getting your credit report.
When you purchase a house, you need to get a home inspection to make sure everything is in working order — if it isn’t, you might be able to negotiate the price of the home with the lender. The cost of a home inspection is typically a few hundred dollars.
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If you’re not buying a new home, you'll have to pay a fee for title search, which will reveal any issues of property ownership (like if someone transferred the house with a quitclaim deed). A defect in the chain of title is called a cloud on title.
Everyone buying a home will need some form of title insurance, which protects against any issues that might arise with the title. There are two forms of title insurance: insurance for the lender and insurance for the owner. It is a one-time cost could range in the thousands, based on the mortgage loan amount.
Learn all about title insurance.
Also known as a processing fee, the origination fee is one of the more expensive closing costs. This fee is paid to the mortgage company for all the heavy lifting they did, like underwriting, to get you your mortgage.
Learn more about loan origination.
If you opted to “buy down the interest rate” on your mortgage with discount points, also known as mortgage points, you’ll be able to pay interest over the lifetime of the loan. Points are a common but usually optional closing cost.
Learn all about mortgage points.
A real estate transaction must typically be registered with the local county, for which you may incur a fee. The recording fee may start around $10, but it depends on the county and the property that is purchased.
Some states levy taxes when property is transferred from one person or entity to another.
When you buy a house, you also have to pay property taxes, private mortgage insurance PMI, and homeowners insurance. You’ll prepay a designated amount, like a month’s worth of taxes and insurance premiums, at closing. These prepaid expenses, referred to as prepaids for short, might be high depending on what the property taxes are like in your area.
Your insurance premiums may also be high if you need to get additional coverage, like flood insurance. If you’re moving into a residential community and need to pay homeowners association (HOA) fees, they may be billed as part of closing costs as well.
The prepaid expenses mentioned above may be held in an escrow account, which will make appropriate payments on your behalf in the future. The mortgage lender may contract with an escrow company and charge you escrow fees as part of your closing costs.
Learn more about escrow accounts.
It’s unlikely that you’ll avoid all mortgage closing costs, but you can minimize some of them. Here are three ways:
You can always talk with your loan officer about your closing costs and see if the lender would be willing to cover some of them. You’ll have the most luck with fees that are associated directly with the lender — like the origination fee or application fee, as opposed to third-party fees, like taxes or insurance premiums.
You can actually ask your seller to cover some of the closing costs, too. The seller doesn’t actually give you money upfront but rolls the fees into your mortgage loan. Seller-paid closing costs are referred to as seller concessions. There are federal limits on how much seller concessions can reduce your total closing costs.
If there are many offers on the home, the seller might not be as willing to offer concessions to the buyer. Working with an experienced real estate agent in your area can help you know best which fees, if any, the seller would most likely to cover.
Learn all how seller concessions work .
Many states and local governments have loan programs in place to help pay for closing costs. They may loan you money or give it to you as a grant. Many are for first-time homebuyers or low- and moderate- income borrowers, or those with poor credit.
If a friend or relative is helping you pay your closing costs, make sure you get a mortgage gift letter.
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