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Wednesday, July 17, 2024

What are mortgage closing costs?

What are mortgage closing costs?

When purchasing a new home, you must pay a wide range of fees during the closing process. These mortgage closing costs help to cover administration costs for preparing mortgage documents, attorney fees, insurance premiums, taxes, and numerous other expenses.

The seller may cover some of these fees, but the buyer incurs the vast majority. Unfortunately, many homebuyers, especially first-time homebuyers, may underestimate exactly how much they need to pay at closing. It’s important to understand what closing costs are involved in purchasing a home, so you can prepare financially.

This guide covers more details about these closing fees, what you can expect to pay, and tips for reducing your out-of-pocket costs on closing day.

How much are typical mortgage closing costs?

Closing costs vary significantly based on your location, the type of loan you receive, the amount of your loan, and your lender.

Most homebuyers, however, can expect to pay anywhere from 3% to 6% of the total loan amount in closing costs, although these average costs1 fluctuate greatly from state to state. Below is a look at the average closing costs for each state plus the District of Columbia, both excluding and including taxes.

State

Average state closing costs (excluding taxes)

Average state closing costs (including taxes)

Alabama

$2,141

$2,371

Alaska

$3,442

$3,442

Arizona

$4,190

$4,190

Arkansas

$2,053

$2,578

California

$5,366

$6,879

Colorado

$3,591

$3,659

Connecticut

$3,643

$7,303

Delaware

$3,687

$17,727

Florida

$4,147

$8,213

Georgia

$2,701

$3,610

Hawaii

$5,600

$7,127

Idaho

$3,544

$3,544

Illinois

$4,894

$6,530

Indiana

$2,101

$2,101

Iowa

$2,021

$2,272

Kansas

$2,548

$2,548

Kentucky

$2,069

$2,229

Louisiana

$3,502

$3,827

Maine

$2,619

$3,761

Maryland

$3,826

$11,710

Massachusetts

$4,434

$7,035

Michigan

$2,845

$4,211

Minnesota

$2,427

$3,843

Mississippi

$2,578

$2,578

Missouri

$1,571

$1,571

Montana

$3,021

$3,021

Nebraska

$2,152

$2,715

Nevada

$3,871

$5,586

New Hampshire

$2,725

$8,039

New Jersey

$4,030

$7,828

New Mexico

$2,825

$2,825

New York

$5,571

$13,262

North Carolina

$2,261

$2,803

North Dakota

$2,381

$2,381

Ohio

$2,772

$3,319

Oklahoma

$2,561

$2,943

Oregon

$3,546

$3,911

Pennsylvania

$3,045

$9,437

Rhode Island

$2,980

$4,619

South Carolina

$2,332

$3,269

South Dakota

$2,024

$2,276

Tennessee

$2,584

$3,790

Texas

$3,754

$3,754

Utah

$4,612

$4,612

Vermont

$3,038

$5,947

Virginia

$3,358

$6,186

Washington

$4,206

$11,513

Washington, DC

$6,250

$29,330

West Virginia

$2,405

$3,352

Wisconsin

$2,456

$3,221

Wyoming

$2,572

$2,572

How does the closing cost process work?

By law, lenders must be upfront about closing costs. Once you submit your loan application, the lender has three business days to provide you with a copy of a loan estimator. This form provides detailed information about the loan, such as estimated interest rates and monthly payments. It should also include a list of approximate closing costs.

While these estimated costs may fluctuate between the time you submit your application and closing day, this form can give you a look at the fees the buyer is responsible for paying at closing. These details can also provide you with an idea as to how much money you need to have available to purchase the home.

Then, at least three days prior to your closing date, your lender must provide you with a closing disclosure form. This form also includes basic information about the loan, interest rates, and a more accurate look at closing costs. If you notice any closing costs that were not listed on your original loan estimator or if any closing fee increased significantly, reach out to your real estate agent or lender immediately to understand these discrepancies.

The 28 types of closing costs fees for a buyer

Homebuyers incur a wide range of fees and premiums during the closing process. Below is a look at what is included in closing costs for the buyer, but keep in mind that not all buyers pay every fee. In many cases, whether you owe these fees or how much you owe for each fee depends on your specific situation.

Application fee

Some lenders charge homebuyers a fee for processing their mortgage application. These costs cover everything from credit checks to filing fees. In some cases, prospective homebuyers must pay these fees at the time they submit their mortgage applications, and these costs are oftentimes nonrefundable. Application fees vary greatly from lender to lender but can be as high as $500. 

Appraisal costs

Many home lenders require homebuyers to have a professional appraisal completed by a third-party home appraisal company. The lender uses this process to assess the actual fair value of the home so it can calculate the loan-to-value ratio on your mortgage. Ultimately, appraisals help to make sure the buyer isn’t paying too much for the property. Appraisal costs can range from $300 to $500 or higher.

Attorney fees

Some states require that real estate attorneys handle the closing process. Even if your state doesn’t require this practice, you can choose to have an attorney present at closing. Real estate attorneys can coordinate the closing process, prepare all documents, and review your home purchase agreement and mortgage contract. Attorney fees vary by law office, state, and the complexity of the purchase.

Closing fee

Typically, you pay closing costs to a third party, such as an attorney, escrow company, or title company. This third-party vendor then takes these fees and distributes them to the appropriate party according to the purchasing agreement. These vendors charge an administration fee, which is either based on a flat fee or a percentage of the loan amount.

Courier fee

You may incur courier fees if the lender must transport your closing documents to a separate location for additional signatures. These fees usually only run about $30 but could be higher depending on your specific situation. However, if your lender uses a digital closing process or if all parties are available at closing, you likely will not incur these fees.

Credit reporting fee

Even though lenders assess your credit report during the initial mortgage application process, many also check these reports prior to closing. Some lenders request that the homebuyer pay these credit reporting fees. If your financial status changes significantly between the application process and closing, the lender may need to pull multiple reports, which can increase these fees.

Discount points

Paying for discount points allows you to reduce the interest rate amount you pay through the duration of your loan. One discount point costs 10% of your overall loan amount. For example, for a $350,000 loan, one discount point would cost $3,500. Keep in mind that discount points are not mandatory, but only applicable if you choose to take advantage of this option.

Escrow funds

Most lenders create an escrow account to hold prepaid costs, such as homeowners’ insurance, mortgage insurance, and property taxes. The lender then pays these fees out of this account when it becomes due. Depending on your lender, you may need to prepay 2 or more months' worth of these payments at closing.

FHA mortgage insurance

If you’re obtaining an FHA loan, you must purchase FHA mortgage insurance to secure the loan. The current FHA mortgage insurance premium is 1.75% of the current loan amount. For example, if you’re obtaining a $350,000 mortgage, your FHA mortgage insurance premium is $6,125. You have two choices for paying this premium. You can pay it as part of your closing costs or you can choose to roll it into the overall costs of your mortgage.

Flood certification

If the property you’re purchasing is in a designated flood zone, you must purchase a flood certification. You can buy this certification through the Federal Emergency Management Agency, which typically costs between $15 and $20.

Homeowners association transfer fee

If you’re buying a property covered under a homeowners association, you, or the seller, must pay a fee to transfer membership. Typically, the seller pays this homeowners association transfer fee, but if the purchasing agreement doesn’t explicitly state this, you may face these costs at closing.

Homeowners' insurance

Nearly all lenders require homebuyers to purchase homeowners’ insurance to protect the property in the event of fire, vandalism, or other damages. Oftentimes, lenders require homebuyers to pay a full year’s worth of homeowners’ insurance at closing. These fees vary based on location, insurance company, and the value of the home.

Loan origination fee

The loan origination fee covers the costs of underwriting and preparing loan documents. You pay these fees directly to your lender, and they cover everything from administration costs to document preparation fees. You can expect to pay anywhere from 0.5% to 1% of the total loan amount for loan origination fees. For example, if your loan amount is $350,000, you can expect to pay between $1,750 and $3,500.

Lender’s title insurance

Lender’s title insurance is another mandatory fee for many homebuyers. This insurance protects the lender in case there are any issues with title ownership or liens that arise after the completion of the title search. Unlike many other types of insurance, title insurance is a one-time payment that homeowners pay at closing, but it provides protection through the duration of the loan.

Lead-based paint inspection

While not typically required, you can choose to have a lead-based paint inspection done on the home you want to purchase. This is especially beneficial if you’re purchasing a home built prior to 1979, before regulations went into effect. It costs around $300 to have a certified inspector complete this process.

Owner’s title insurance

Owner’s title insurance is similar to lender’s title insurance, except it protects the homebuyer from any future title issues or legal challenges. This insurance coverage is typically optional but does protect the homebuyer for the duration of the loan. You can expect to pay anywhere from 0.5% to 1% of the total loan amount for owner’s title insurance.

Pest inspection fee

Depending on what state you live in, you may need to pay to have the home examined for pest damage, such as termites. Some government-supported home mortgages also require pest inspections. This type of inspection costs around $100 and can be paid by the buyer or seller, depending on the agreement.

Prepaid daily interest charges

Depending on your lender, you may need to pay prepaid daily interest charges. These fees include interest that accrues from the closing date to the date of your first mortgage payment. The amount of prepaid daily interest you need to pay at closing depends on your total loan amount, interest rates, and the number of days you need to pay interest. Your lender will let you know how much this payment is closer to your closing date.

Private mortgage insurance (PMI)

If you make a down payment of less than 20% of your total loan amount, your lender will likely require you to purchase private mortgage insurance (PMI). This insurance protects the lender in case you default on your loan. In some cases, homebuyers must make a one-time payment for PMI insurance, but in other cases, the homebuyers can roll these costs into their monthly mortgage payments.

Property tax

At closing, you may also need to pay a prorated portion of the annual property tax. Your lender keeps this money in an escrow account and then pays your tax bill when due. The amount of property tax you need to pay depends on the value of your home and the property tax rates in your specific location.

Rate lock fee

Some lenders also charge a rate lock fee to give you a set interest rate for a certain period, which typically runs from your preapproval date to closing day. This fee could run anywhere from 0.25% to 0.50% of your loan amount. For example, if your loan is for $350,000, your rate lock fee could range from $975 to $1,750.

Recording fee

At closing, you need to pay a small recording fee to your county or city governmental agency to update its property records. This fee averages about $125.

Survey fee

A property survey involves having a professional go to the location and verify and mark all property lines. Some states require that homebuyers survey the land prior to purchase. Even if your state doesn’t require this step, you may want to have one done if there are any unclear boundaries or to avoid future neighbor disputes. Survey fees range from $300 to $950.

Tax monitoring and tax status research fees

Depending on your lender, you may also need to pay a third-party vendor to verify your property tax amount. This vendor also tracks your property tax payments for the duration of your loan and notifies your lender if you miss any payments. These fees vary by lender and location.

Title search fee

The title search process is done to check that there are no liens or ownership issues, such as unpaid taxes or ownership disputes, involving the property. Depending on where you live, a real estate attorney or title company completes this search. Title search fees range from $200 to $400.

Transfer tax

You may pay a transfer tax to your local government to cover costs for updating the property deed and transferring ownership from the seller to the buyer. Fees vary by location.

Underwriting fee

An underwriting fee covers the costs for the lender to examine your loan application and verify all information, including income, credit, and employment, to make final approval for the loan. You may pay up to $800 for this.

VA funding fee

If you’re obtaining a VA loan, you may incur a VA funding fee2 at closing. This fee helps to recoup loan processing costs. These fees range anywhere from 1.4% to 3.6% of your total loan amount, depending on your down payment amount and if it’s your first VA loan. Some veterans, such as purple heart recipients, may be exempt from this fee. You can opt to have these costs rolled into your mortgage payments.

The 8 types of closing costs for a seller

There are also several types of closing costs the seller may need to pay at closing. Here’s a look at the most common closing costs for sellers.

Attorney’s fee

If the seller chooses to bring an attorney to closing, they are responsible for paying their own attorney fees. The seller typically doesn’t cover any costs for the buyer’s attorney, unless a separate agreement is made between the seller and buyer. These fees vary by attorneys, who may charge a flat fee or by the hour.

Credits toward closing costs

Depending on the situation, the buyer may be able to entice the seller to pay a portion of the closing costs. This is referred to as seller concessions and may be used to help the property sell faster. If the seller agrees to any of the concessions, they need to pay these credits at closing.

Escrow fees

Escrow accounts hold specific funds from the seller to make future payments. The lenders charge escrow fees to cover the costs of managing this account. Since escrow accounts help to protect the seller by preventing the buyer from backing out of the sale, the seller may agree to pay 50% of these escrow fees.

HOA fees

The seller is responsible for prorated HOA fees up to the date of closing. The amount depends on the closing date and annual dues, but the HOA administrator can calculate the exact amount.

Prorated property taxes

The seller also must pay property taxes up to the closing date. These taxes are prorated from the beginning of the tax year to the date of closing. The seller’s tax burden varies based on property value and local property tax rates.

Real estate agency commission

During a property transaction, both real estate agents involved receive 50% of the commissions. In most cases, the seller is responsible for paying the seller’s and the buyer’s portion of this commission, which can range anywhere from 5% to 6%.

Recording fees and transfer taxes

County and city governmental agencies typically charge a fee for recording and transferring property ownership from one party to another. In many cases, the seller is responsible for paying these processing fees, which vary from location to location.

Title insurance

Depending on your specific purchasing agreement, the seller may be responsible for making a one-time title insurance payment at closing. This insurance helps to protect the homebuyer in case any issues regarding the property title arise during the duration of the loan. These fees range from .05% to 1% of the loan amount.

How to reduce closing costs

As you can see, closing costs can quickly add up, and you may pay more out-of-pocket expenses at closing than you expect. There are, however, several steps you can take to minimize these costs, including:

Shop for lenders

One of the most important steps you can take is to shop around and compare lenders before applying for a home mortgage. Not only do you want to compare interest rates, but you also want to pay close attention to various fees the lender charges, such as application fees, rate lock fees, underwriter fees, and loan processing fees. The combination of these can add up if you’re not careful.

Comparing lenders isn’t the only step you can take. You should also compare third-party vendors, such as homeowners’ insurance companies, title companies, surveyors, and pest inspectors. While your lender may recommend certain vendors, you typically don’t have to use the ones they recommend. This gives you the opportunity to shop around and compare costs.

These steps can help to reduce the overall fees you have to pay during the closing process.

Request contribution from the seller

During a buyer’s market, you may be able to entice the seller to cover a portion of the closing costs to help alleviate some of these out-of-pocket fees. The arrangement is typically negotiated through each party’s real estate agent, but it’s important to check that these details are listed in the purchasing agreement. Keep in mind that the seller may reject your offer if you push for too many concessions. Your real estate agent should be able to help you determine a fair amount.

Can closing costs be rolled into a mortgage?

Depending on your lender, you may be able to roll your closing costs or a portion of your closing costs into your mortgage. This process means that instead of paying these fees all at once during closing, you pay a higher monthly mortgage payment to cover these costs over a longer period of time.

Before choosing this option, it’s important to note that many lenders that offer this option may charge higher interest rates. Make sure you compare your options and calculate your monthly mortgage payments prior to making this decision.

Our take

Purchasing a home can be a great investment opportunity, but it’s important to understand all the costs involved prior to applying for a home mortgage. Understanding how much your estimated closing costs are and what steps you can take to reduce these costs may help make homeownership a more affordable option for you. The trick is to read the details and understand all costs involved right from the start of the lending process.

 

1 Bankrate, Average mortgage closing costs by state, June 2022.

2 U.S. Department of Veterans Affairs, VA funding fee and loan closing costs.

RO2701963-0223

Oksana Doncila, CFP®

Contributor

Oksana Doncila is a Senior Financial Professional at Empower. A CERTIFIED FINANCIAL PLANNER™ professional, she works with Empower Personal Wealth investment clients and provides a wide range of financial planning services for clients who are enrolled in the Personal Strategy managed asset program. 

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites.

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