When you purchase a home, your down payment isn’t the only thing you need to pay at the closing table – you’ll need to pay closing costs too. This may come as a surprise to many first-time homebuyers, so we’re bringing you a breakdown of what closing costs typically cover and what you can expect to pay.
What Are Closing Costs?
Closing costs are processing fees that you’ll need to pay to your mortgage lender and include fees they pay to third parties, such as appraisers and title companies on your behalf. These fees are charged in exchange for creating and servicing your mortgage to purchase your home.
How Much Are Closing Costs?
Closing costs usually come to 3% – 6% of the property purchase price. Let’s say you secure a home loan for $200,000. You can expect your closing costs to range from $6,000 to $12,000.Your specific closing costs will depend on the type of mortgage you have and the location of your home purchase, and are paid when you close on your loan.
It’s important to note that closing costs do not include your down payment. Sometimes, homebuyers may even be able to negotiate with the seller to cover a portion of the buyer’s closing costs.
Average Homebuying Closing Costs
Closing costs vary from one home buying transaction to the next. Some fees are required by specific lenders, some are government required, and others may be optional. Therefore, closing costs will vary based on the lender, loan type, and location.
At least three days before your closing, your lender is required to provide you with a Closing Disclosure. This document itemizes each closing cost that you will need to pay and the total amount you will owe.
Below are the most commonhomebuying closing costs, listed in alphabetical order, with a brief explanation of each. However, this is not an all-inclusive list as closing costs are dependent on specific homebuying situations.
The application fee is charged by your lender to process your home loan and can be up to $500. Even if your loan is denied, you’ll still need to pay an application fee as it is non-refundable.
A third-party appraiser conducts an appraisal to determine the value of the property you are purchasing, as your lender will not give a loan for more than the home is worth. The appraisal also lets you know that you are not overpaying for the property. Appraisal fees typically range between $500 and $700, but in some cases can be higher.
Borrowers can reduce the interest rate on their mortgage by buying discount points. This allows you to buy down your interest rate so you can save on interest over the life of the loan. One discount point equals 1% of your loan amount, so if you take out a mortgage for $100,000, one point would cost $1,000. Purchasing discount points is optional.
Also referred to as reserve fees or prepaids, escrow funds are money you pre-pay for property taxes, premiums, homeowners insurance, and mortgage insurance. Your escrow funds are held by your lender in a special account, which they use to make payments on your behalf, as part of your regular mortgage payment. Different lenders require a certain number of months’ expenses to be held in your escrow account.
FHA Mortgage Insurance
With an FHA loan, your mortgage insurance premium (MIP) may be paid upfront at closing, or in most cases, is financed in with your loan. The current MIP rate is 1.75% of your loan amount. For example, if you borrow $100,000, your MIP closing cost would be $1,750. This expense is separate from your regular monthly MIP, which ranges from 0.45% – 1.05% of your loan amount.
Taking out a homeowners insurance policy is required as a condition of your mortgage and protects you if your home gets damaged. Lenders typically require a year’s worth of homeowners insurance to be paid at closing. The cost of homeowners insurance varies based on the value and age of your home, as well as your claims history
Loan Origination Fee
Loan origination fees are charged by some lenders to cover the cost of processing and underwriting your mortgage. Costs vary based on your purchase price and loan amount.
Lender’s Title Insurance
This fee is paid to the title company that protects your lender if an ownership dispute or lien arises that wasn’t found in the title search. Lender’s title insurance can cost up to $875.
Owner’s Title Insurance
This is insurance that protects you in case someone challenges your ownership of the home. It is optional but highly recommended. Costs vary based on purchase price and loan amount.
Private Mortgage Insurance (PMI)
If you take out a conventional mortgage andput less than 20% as your down payment, you will be required to pay PMI, which protects your lender if you default on your loan.The exact amount you’ll owe for PMI at closing depends on your lender, but most home buyers pay $30 – $70 per month for every $100,000 they borrow, and the first month is due at closing.
Property taxes are fees paid to your local government and fund public schools, first responders, roads, and other local needs. Your property taxes are calculated based on where you live and your home’s value. You might be required to pay pro-rated property taxes from your closing date until the end of the current tax year.
Title Search Fees
Title searches check for claims on the property you are buying, as any current liens, bankruptcies, or unpaid back taxes can mean that the seller doesn’t technically own the home they’re selling. Title searches can range from $200 to $400.
VA Funding Fee
If you have a VA Loan, you will need to pay a VA funding fee at closing, which goes towards administrative costs for the VA loan program. If this is your first time using a VA loan, and if you put down less than 5% on your loan, your VA funding fee is 2.3% of your total loan value. With a 5% or more down payment, your fee is 1.65%, and a 10% or higher down payment lowers your fee to 1.4%.VA funding fees are increased for any subsequent VA loans you secure for a refinancing or next home purchase. This fee can be waived if you’re receiving VA disability, are a surviving spouse of a veteran who died while in service or resulting from a service-related injury, or if you’re an active-duty Purple Heart recipient.
Paying closing costs are a normal part of the homebuying process, and you can take comfort in the fact that when you purchase your next home, there will be no surprises. Speak to a Cross Timbers Mortgage loan advisor to learn more about closing costs and what you can expect when you purchase your next home.