What Are Closing Costs?
What You Can Expect to Pay on Closing Day
When you close on your mortgage, you’ll likely have to pay
closing costs. These costs can vary depending on whether you’re buying or refinancing a home. The amount you pay depends on factors like the type of loan, your financial profile, the state in which the property is located, and more. Common closing costs may include:
- Appraisal fee: Paid to a third-party appraiser who determines the property’s market value. This generally costs between $300 and $500, but the price may vary based on location, property complexity, and home size.
- Attorney fee: Paid to an attorney to review and prepare necessary financial documents. Not all states require an attorney for closings.
- Credit report fee: A charge for pulling your credit report.
- Home inspection: A professional inspector evaluates the home for issues like leaks, mold, or structural problems.
- Mortgage broker fee: If you used a mortgage broker, their fee may need to be paid at closing.
- Origination fee: A fee for originating and processing your loan application, often a percentage of your loan amount.
- Pest inspection: In some states or for certain loans, a pest inspection may be required. The cost typically averages around $100.
- Points: These are fees paid to reduce your interest rate. One point is equal to 1% of the loan amount. You can opt to pay points to lower your rate on some mortgages.
- Prepaid interest: Interest that accrues between your settlement date and the end of the month in which your loan closes.
- Property insurance: Payment to insure the property, with costs typically included in your escrow account. You’ll contribute to this account monthly as part of your mortgage payment.
- Property taxes: Pro-rated property taxes for the first year of ownership. Similar to insurance, taxes are typically paid into your escrow account monthly.
- Recording fees: Fees charged by local governments to record the transaction in public records.
- Title search: A fee to search for any liens on the property and verify ownership.
- Upfront mortgage insurance premium: Required if you choose an FHA loan.
- Underwriting fee: Covers the cost of processing and underwriting the loan.
How Much Are Closing Costs?
Closing costs can vary based on the type of loan and other factors. Here’s an idea of what you might expect:
- Conventional loan closing costs: Typically range between 2% and 5% of the home’s price.
- FHA loan closing costs: According to the U.S. Department of Housing and Urban Development, FHA closing costs usually range between 3% and 4% of the home’s purchase price. Additionally, you’ll pay an upfront mortgage insurance premium of 1.75% of the base loan amount.
Are Closing Costs Tax-Deductible?
Some closing costs may be tax-deductible. For instance, mortgage insurance premiums, property taxes, prepaid interest, points, or origination fees might be deductible. On the other hand, costs such as home appraisals, inspections, title insurance, and HOA fees are generally not deductible. Always consult a tax advisor for guidance on which costs may be deductible based on your specific situation.
Who Pays Closing Costs?
Usually, homebuyers are responsible for covering their closing costs. However, in some cases, the seller may agree to pay a portion of the buyer's closing costs, often in exchange for a higher sale price. Sellers typically cover the real estate agent’s commissions and may also pay some taxes for the period they owned the home.
Closing Cost Assistance
Some states and counties offer programs or grants to help with closing costs. These are often called
homebuyer assistance programs and function similarly to down payment assistance programs. Visit the
Housing and Urban Development (HUD) website to find homeownership assistance programs available in your area.
How to Check Your Closing Costs
Make sure you fully understand your closing costs before closing day. After you submit your mortgage application, you’ll receive a
Loan Estimate from your lender, which will outline your estimated closing costs. Once your loan is approved, you will receive a
Closing Disclosure, which provides the final costs you’ll need to pay at closing.