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What Homebuyers Need to Know About Closing Costs
What you'll learn: Average percentage for closing costs, typical fees, and ways you can save money
EXPECTED READ TIME: 3 MINUTES
April 21, 2023
It’s easy to zero in on interest rates when shopping for a mortgage. While rate does affect your home buying budget, there’s another important item to consider: closing costs. These are the fees and costs of getting a mortgage that are typically due at loan closing. Read on to learn how to estimate closing costs, what is included in a buyer’s closing costs, and ways to potentially save on closing costs.
How much are closing costs?
The typical mortgage closing costs are between two percent and five percent of a loan’s purchase price. Here are some sample numbers:
| Mortgage Amount | Typical Closing Costs |
|---|---|
| $350,000 | $7,000 – $17,500 |
| $500,000 | $10,000 – $25,000 |
| $750,000 | $15,000 – $37,500 |
Why such a wide range? Closing costs vary depending on various factors including the type of loan, your lender, and the services performed to process your mortgage. It may sound like a large dollar amount needed at the time of closing, but you may be able to reduce your upfront or overall costs.
- Tip: Use a closing cost calculator to estimate your charges.
What is included in closing costs?
First, let’s examine what’s included in the typical closing costs for a mortgage. Closing costs are generally lumped into three categories: origination fees, title fees, and prepaid costs.
Origination fees
Each lender may handle their fees or costs differently. Some bundle everything into one origination fee (sometimes called origination or lender points), and others break fees out individually. In many cases, lenders simply pass on costs they incur throughout the process.
The typical mortgage origination fees include:
- Home appraisal fee
- Courier fees
- Credit check fee
- Flood certificate fees
- Underwriting fees
- Processing and administrative fees
Title fees
Most closings also include title fees, which grant you the home deed and official ownership. These fees typically cover the cost of title search, insurance, and settlement. You may also choose to maintain title insurance after buying a home to protect your investment.
Prepaid home costs
Prepaid costs may include insurance premiums, property taxes, homeowners association (HOA) fees, and more. They are often held in a third-party escrow account and paid as they come due.
You might prepay one full year of homeowners insurance and keep an extra two months in reserve. You may also need to pay the rest of the year’s HOA fees or other fees and taxes. Your loan estimate will further outline all of these fees.
Mortgage discount points
An optional fourth category is the cost of discount points. If you decide to buy down your mortgage rate with discount points, the cost may be due up front at closing. This can be a good tactic to reduce your overall loan cost if you have the cash available. One mortgage point is equal to one percent of the total home loan.
Who pays closing costs?
Buyers are typically responsible for mortgage closing costs. However, sometimes motivated sellers will cover some of the loan costs. And some mortgage types, like Federal Housing Administration (FHA) loans, allow the seller or another third party to pay up to a certain percentage toward a buyer’s closing costs.
How can you save on closing costs?
It’s unlikely to avoid paying closing costs completely, but there are creative ways to reduce the amount needed up front.
- Negotiate – As mentioned, it’s sometimes possible to negotiate with a seller to pick up some of a buyer’s costs. The savings may be offset by a higher purchase price or rolling the costs into the loan amount.
- Consider loan type – There are some mortgage types — like FHA and VA loans — which generally have fewer closing costs and ultimately may require less money at closing.
- Compare lenders – Credit union closing costs tend to be lower than other mortgage providers. This is one of the many advantages of a credit union mortgage.
Can you roll closing costs into a mortgage?
Depending on your lender’s rules and loan type, some closing costs may be rolled into a loan. While this means you’ll pay less up front, it also means you’ll increase your loan balance – ultimately paying more in interest over the life of the loan.
When do I know my closing costs?
You’ll receive a closing disclosure at least three days before you are scheduled to close on your loan. It will include a final overview of your loan type, annual percentage rate (APR), closing costs, and the actual cash needed to close. This is your chance to review the final details and, if applicable, wire your funds for closing.
SIMILAR ARTICLES
VA Loan Closing Costs – Everything You Need to Know
Do VA loans have closing costs? Who pays VA closing costs? Can you roll closing costs into a VA loan? Discover the answers to these and more common questions.
Creating Your Home Buying Budget
If you're buying a home, it's essential to know what all of the costs are so you can plan ahead. Find out about the different fees for inspections, closing costs, down payment, and more.
No Closing Cost Refinance vs Refinance with Costs
A zero cost refinance may sound like the obvious choice, but are there reasons to choose closing costs? Let's take a look.
How to Wire Funds for Closing
Here's what you need to know about wiring money to close on a home, how wire transfers work, timing, & safety tips.
Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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