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Closing Costs: What to Expect Beyond the Sale Price

 When determining how much you can afford while shopping for a new home, there are lots of variables to consider – interest rates, your monthly income, insurance, and property tax, to name a few.  But one thing that often gets overlooked is the amount that you’ll be paying in closing costs. This amount will vary widely from home to home, but it’s important to keep in mind the additional costs associated with closing on your home and to plan accordingly for these costs.

What are closing costs?

Closing costs are costs that are paid to your mortgage lender in order to process your home loan. The payment for these costs is due upfront and must be paid at the time of your loan closing. You may find the following things included in your closing costs:

  • Application fee
  • Appraisal
  • Attorney fees
  • Flood certification
  • Homeowners Association transfer fee
  • Title Insurance
  • Survey fee
  • Rate Lock fee

However, the biggest portion of closing costs typically go to the Loan Origination fee, Homeowner’s Insurance, and Property Taxes.

The Loan origination fee is the fee charged by your lender in exchange for creating, processing, and filing your home loan. This is their payment for the work – such as screening and pre-approving your application, verifying your financials, underwriting, creating closing disclosures, etc. – that they do in order to process your loan. This will typically run about 1% of your total loan value. If your down payment is less than 20%, many lenders will also require that you pre-pay for 1 year of homeowner’s insurance, property taxes, and private mortgage insurance (PMI) when you close on your loan. This money goes into an escrow account, which is then used by your lender to make these payments on your behalf.

How much should I expect to pay in closing costs?

The amount of closing costs for each individual real estate transaction varies, but you should typically expect to pay around 3-5% of your total loan value. For example, if you’re buying a $500,000 home, you should plan for $15,000 – $20,000 in closing costs.

If you’re paying a larger down payment, then your closing costs may be on the lower side of this range as you may not have to pay Private Mortgage Insurance (PMI) or pre-pay for your insurance and taxes. Your loan originator will be able to give you a more exact estimate, based on your specific situation.

Who pays closing costs?

In a typical mortgage transaction, buyers and sellers each pay for some portion of the closing costs. While the costs we’ve outlined so far are on the purchase side, a seller has their own closing costs as well – the biggest being the commission fees for both the buyer’s and seller’s real estate agents.

However, you may also be able to decrease the portion of closing costs that you’re responsible for (as the buyer) through seller concessions. Seller concessions are funds that are contributed by the seller toward the buyer’s closing costs. Seller concessions can be extremely helpful in minimizing your upfront costs and are a useful bargaining chip, especially if you’re looking to purchase in a buyers’ market. Keep in mind that there are limits on the amount of seller concessions allowed based on your loan type, typically a certain percentage of the total value of your loan.

It is also important to note that seller concessions can only be used for closing costs on your home. For example, if your seller agrees to $8,000 in concessions, but your closing costs only end up at $6,500, then the remaining $1,500 is kept by the seller not paid out to the buyer. 

Closing costs can be a big surprise for some first-time homebuyers, so be sure to plan ahead and make sure you have enough cash on hand to cover this amount. A licensed Mortgage Loan Originator will be able to work through your specific closing costs estimate and answer any questions you may have to ensure that you’re set up financially for a stress-free closing.