Mortgage Closing Costs: What They Are and How Much You’ll Pay
It’s easy for homebuyers, especially first-time buyers, to focus on a home’s sticker price or down payment amount without considering “closing costs.” A vague term covering a collection of fees closing costs can be challenging to pin down, and yet they can add up to a significant expense, typically ranging from 2% to 5% of the amount you’re borrowing.
As the name implies, closing costs are booked right when your mortgage is finalized, and you’re about to take over title to the property. The buyer pays most, but the seller may also have to pay some.
Even if you’re taking advantage of historically low-interest rates, closing costs can be high and are worth factoring into your home buying budget. Here’s what you need to know to avoid last-minute surprises.
What are the closing costs of the mortgage?
According to the Consumer Financial Protection Bureau, closing costs refer to the initial fees charged to secure a loan and transfer ownership of a property. They are sometimes referred to as settlement costs.
They cover a lot of behind-the-scenes transactions and document posting. Realtors, banks, title companies, appraisers, and document drafting attorneys must be paid. According to a list published by the Consumer Financial Protection Bureau, some common closing costs include title insurance, government taxes, appraisal fees, tax service provider fees, and prepaid expenses.
The buyer usually ends up paying the bulk of these costs, but standard agreements vary from state to state and from agreement to agreement. Sometimes a buyer may negotiate to have the seller bear some of the closing costs in exchange for a higher overall sales price. Buyers may also have a lender contribute to closing costs. But again, that could result in a higher loan amount or interest rate.
What do closing costs pay?
Your closing costs will depend on your particular transaction and may be affected by interest rates, local insurance rates, tax rates, local appraisal fees, and other factors. But here is a general breakdown of some of the common expenses covered by closing costs:
Title Insurance protects lenders from financial loss resulting from title-related issues such as liens or ownership disputes.
Government taxes: These could include property tax on the home, local government fees, such as one to record the sale of the property, and a tax for transferring title from the seller to the buyer.
Appraisal Fees: These are charged by an appraiser for going to the property and assessing the value of the home to determine the appropriate loan amount.
Tax Service Provider Fees: This helps pay third parties to track property tax payments and other tax control tasks.
Prepaid expenses: Items like homeowners insurance, property taxes, and interest until the first payment is due.
How much are the closing costs?
Most lenders and industry observers will tell you that your closing costs, on average, will cost you between 2% and 5% of the amount borrowed.
The national average closing costs for a single-family property were $5,749 with taxes included and $3,339 without taxes in 2019, according to ClosingCorp, which analyzes industry closing cost data.
For a more specific estimate, we used a BBVA Banking Service Closing Cost Calculator to show what these fees might look like for a $250,000 loan. After entering a 20% down payment, 30 years for the term, and a 4% interest rate, the total amount of closing costs was calculated to be $7,042.
What are closing documents?
One of the key documents you’ll get before final signing is the closing disclosure, which outlines details about your loan, including closing costs. The lender must provide you with this document three business days before the loan is scheduled to close.
It is very important to review this document to ensure that all information is correct and that the terms of the loan are accurate and clear. This final disclosure explanation may help you as you review the document. He mentions making sure your closing costs match your most recent loan estimate, among other tips.
Other important closing documents include:
Promissory Note – A legal document stating that you will pay your mortgage.
Mortgage, Security Instrument, or Trust Deed – Gives the lender the right to take your property by foreclosure if you don’t pay your mortgage according to the terms you’ve agreed to.
Initial Escrow Disclosure Statement – Itemizes the charges you pay toward an escrow each month.
Right to Cancel Form – Describes the rules about when and how you can cancel your loan, typically used as part of the refinancing process.
If you have questions about any of these, ask your lender, broker, or attorney for help.
Is closing costs tax-deductible?
The IRS says the only closing costs you can deduct are the points you pay to lower the interest rate on your home mortgage and property taxes you must pay upfront. If you itemize, you can deduct these costs during the year you buy your home.
The IRS also has a list of closing costs that you can add to your home base. They include things like legal and registration fees and surveys.
Tax rules are constantly changing, so we recommend that you talk to a tax professional about what you can and cannot deduct from your home closing.
Tips and tricks to save on closing costs
Saving all your cash for a down payment is a mistake to avoid when buying a home. Closing costs are thousands of dollars extra on top of the down payment you may not have expected.
But there are ways to save.
“In the seller’s market, we have offered to reimburse borrowers for the cost of the appraisal, we have a network of title companies that will reduce title fees and provide grant programs for qualified borrowers to cover down payment and some closing costs. says Steve Twyman, branch manager with mortgage experts “There are also options for credit from lenders.”
Of course, this is where a strong credit rating will pay off, adds Twyman.
Orlando Miner, director of Miner Capital Funding, LLC, recommends seeing if you can get the seller to pay closing costs. “This is a common thing, so don’t be embarrassed to ask. Remember that the worst that can happen is that they might say ‘no’.”
But again, this will be more difficult to negotiate when it is a seller’s market, as it is now in many regions of the US.
Miner adds that timing is key. For example, closing at the end of the month will allow you to save on prepaid interest. “The rule is that you have to pay prepaid interest from the closing date to the end of that month. Therefore, the closer you are to the end of the month, the less money you will pay.
You may also want to play around with closing cost calculators. These can show you at least roughly how much you may be paying in closing costs as a lump sum.