Closing Costs Explained

When you're preparing to buy a home, there's a good chance your main focus is on securing enough money for the down payment. It’s important to remember, however, that you'll also have to pay closing costs on the date the transaction closes. While these costs are generally less than your down payment, they can add up to thousands of dollars.

What Are Closing Costs?
You pay closing costs when the transaction closes. Most of these costs cover the underwriting process that takes place when your lender creates your loan, but certain fees apply to all transactions, even cash deals. These expenses can involve everything from title search fees to appraisal costs. The specific amount you pay depends on where you live and the type of loan you're applying for.

How Much Do You Pay?
Closing costs can be anywhere from 3-6% of the total loan amount, which means that a mortgage of $300,000 may come with closing costs that range from $9,000-$18,000. Depending on your negotiating power, it might be possible for you to negotiate some of these costs with the seller.

Types of Closing Costs
Here are the primary expenses you might expect to pay as the buyer:

• Application fee: Lender charges this fee to process the application
• Appraisal fee: Paid to the appraiser for evaluating the market value of the property
• Closing fee: Small fee that's paid to your closing company
• Deposit for escrow: Up to two months of mortgage insurance payments and property taxes
• Homeowners insurance: Provide evidence that you've paid your homeowners insurance premium
• Title insurance: Protects buyer and lender if a lien or ownership dispute is eventually discovered after the title search
• Origination fee: Covers all administrative costs for processing your mortgage
• Private mortgage insurance: Only necessary if your down payment is less than 20%
• Recording fee: County or city charges this fee to create public land records
• Title search fee: Costs charged to review previous property ownership records
• Underwriting fee: Lender fee to cover the process of verifying a buyer's income, financial information, credit, and employment

Negotiating Closing Costs
You may be able to negotiate closing costs by comparing lender fees before applying or scheduling the closing date towards the final days of the month. You could also work directly with the seller to have them cover some of the closing costs or reduce the purchase price.

Closing costs are part of every home sale. While these costs can be high, your lender should give you an estimate of your closing costs along with your projected monthly payments shortly after you apply for the loan. They will provide the final numbers in the Closing Disclosure a few days before your closing date.