Complete Consumer Guide to Closing Costs

In the United States average closing costs for homeowners are about $3,700, though that depends heavily on home price and location. You can get a more detailed breakdown of your local market conditions by using this map.

Some lenders advertise "no closing cost" loans, however this means these costs are rolled into the rate of interest on the loan. A small change in interest rates can add up to a substantial sum over the course of 30 years. For your convenience here is a table of current local rates.

 

A Practical Example Highlighting Common Closing Costs

Fee	Rough Cost	$250,000 Home Est.	Paid to	Background
Origination Fee	1%	$2,500	Bank	Covers the cost of making the loan. This fee may be negotiable.
Discount Points	0% to 3%	$0 to $7,500	Bank	Homeowners can pay an upfront sum to lock in a lower rate of interest if they know they will be living in a house for an extended period of time.
Credit Report & Loan Application		$25 to $400	Bank	This fee is rather easy to waive given how small it is relative to other expenses.
Private Mortgage Insurance (PMI)	0% to 1%	$1,853	Bank's Insurance Company	This monthly payment protects the bank against the risk of loan non-payment. It is only required on a typical conforming mortgage if you pay less than 20% down until you have at least 22% equity in the home, or 20% equity and you request the fee removed.
First Interest Payment	0% to 1/12th APR	$500	Bank	This covers the interest fee from the date your loan is closed until your first regular monthly payment.
Title Services & Title Insurance	$275 to $5,000	$1860	Title Company	Title insurance is a required purchase to protect lenders against claims on a home.
Property Taxes	0% to 2%	$400	Local Government	The local property taxes are due yearly & depend HEAVILY on the location & the municipal budgeting for large expenses like new schools. Some banks may roll these directly into your loan payment. Accrued property taxes which are still owed on the home may need to be paid.
Appraisal	$150 to $400	$350	Appraiser (by the bank)	Banks verify the value of homes before lending against them.
Survey	$150 to $400	$350	Survey Company	Used to verify & draw the boundaries on the property.
Homeowners Insurance	$450 + 0.2%	$950	Insurance Agent	Protects your home from common issues. Some problems like flooding may not be covered by homeowner's insurance.
Government recording fees & transfer taxes	$25 to $1,400	$50	Local Government	Recording a property sale has an associated documentation fee, but some locations also charge sales tax and/or transfer tax.

Understanding Closing Costs

Home buyers face wide-ranging concerns, from locating suitable properties to successfully closing deals. The intimidating process is wrought with details, so understanding basic financial principles helps buyers reconcile the monetary aspects of real estate purchases. Although cash sales do occur among well-funded buyers, in practice, most would-be home owners require outside financing when closing a transaction on real property.

The process of obtaining mortgage financing and transferring property ownership incurs costs, which must be settled, before a transaction is considered complete. The total amount paid toward closing costs varies, according to conditions surrounding each deal, yet most buyers experience similar fees and charges. Generally, the total amount paid for closing a residential real estate deal represents less than 5% of the home's purchase price.

Many of the standard closing costs are fixed, so buyers pay the same amount, regardless of where financing is obtained. Registering deeds and documents, for example, is typically done for a flat fee. Some ancillary expenses, on the other hand, are negotiable and subject to the discretion of lenders and other real estate transaction partners. It is important for buyers to know the difference, and to understand where closing costs originate.

Regulation Protects Buyers

Recent difficulties within the mortgage industry ultimately changed the way lenders do business with their clients. In order to protect home buyers from financial distress, legal mandates now require very specific financial disclosures during the application and closing process. The transparency hedges against surprises and misunderstandings, empowering consumers to make informed mortgage decisions.

Know Before You Owe is a Consumer Financial Protection Bureau (CFPB) initiative designed to simplify the mortgage lending process for applicants. By requiring standardized disclosures, the government oversite agency ensures mortgage companies operate fairly and provides documentation buyers use to compare terms and select financing. The updated program continues consumer protection once covered by policies mandating a Good Faith Estimate (GFE) and Truth in Lending Disclosure for each loan application. Once approved, each mortgage was finalized using a fresh Truth in Lending Disclosure, as well as a HUD Settlement form.

Under Know Before You Owe, two required documents replace the four disclosure forms once used. The Loan Estimate and Closing Disclosure are now used by lenders to estimate and convey the cost of borrowing, outlining customary fees and charges on an easy to follow, standardized document. Loan estimates provided upon application account for the predicted cost of various application charges, documentation expenses and closing costs, including loan origination fees, which are easily compared using the form.

The estimated cash to close section provides a snapshot of potential closing totals, establishing a baseline for lending organizations, which typically require proof an applicant can cover the charges. As transactions are consummated, buyers provide a cashier's check or wire transfer to pay for the actual cost of closing. These figures are provided within the Closing Disclosure, which serves as a finalized form of the preliminary estimate document.

Customary Buyer Expenses

The most substantial resource required for home ownership is the down payment required to initiate financing. But money down is not the only up-front expense associated with a home purchase. In order to finalize sales, the buyers (and sometimes sellers) are on the hook for various expenses accrued during the transfer process. Closing costs commonly include the following fees and expenses:

• Appraisal — The value of the property is central to each real estate transaction. Since the property itself serves as collateral for the loan, banks and other lenders do not want to extend financing that exceeds the value of the home. As a result, outside appraisals are ordered, for timely assessment of actual property values. When an independent appraisal fails to identify sufficient value in the property and structures present on a parcel, mortgage financing commonly falls through. Alternatively, buyers can add larger down payments or seek terms with a different lender. The fees for appraisals generally pass through to the buyer, as part of the final reconciliation. It is important to remember appraisals have shelf lives, so they must be conducted within a particular time frame, relative to the sale. If a deal is delayed and cannot be closed in time, additional appraisals may be required, adding to the total closing tab. The cost of each appraisal varies, based on the size of the property and the complexity of the valuation process.
• Credit Check — Early in the application process, lenders request credit reports, to establish creditworthiness. For a fee, three main reporting agencies furnish up to date information about applicants' credit history. Reports share past and present financial information, including the number of open forms of credit on file, total outstanding balances for mortgages, credit cards and utility accounts, as well as records detailing credit irregularities. The charge for pulling each credit reference represents an added line item on a closing ledger. The amount each applicant is to be charged must be revealed before the credit check is ordered, and the final closing balance should account for precisely that sum.
• Home Inspection — Depending upon where a mortgage is obtained, home inspections are either mandatory or optional safeguards ordered by buyers. The cost of inspections is typically paid outside of the final closing, but in some cases, services requested by lenders and buyers are rolled-in to the final tabulation. In either case, anticipating home inspection fees keeps home buying budgets on track. Beyond general inspections, specialized contractors may also be needed to evaluate particular systems. And flooding concerns prompt banks to seek flood certification before granting loans, attesting to the integrity of a structure's location. Fees for flood checks are shown as dedicated line entries on closing documents.
• Loan Origination Fee — Mortgage bankers are in business to generate profits, so services come with a price tag. The loan origination fee represents the charges imposed by a lender for extending mortgage financing. Once established, the fee must be included on the estimates provided to applicants and must also be accounted for on the final Closing Disclosure. Total fees are noted as a percentage of the value of a mortgage, or as a flat-rate cost of obtaining funding through a particular vendor. Lenders have discretion setting origination fees, so unlike some customary charges, there is room to negotiate and shop for better rates. In fact, under certain circumstances, lenders will waive the origination fee, relying on the interest alone to remain profitable on a particular deal.
• Discount Points — Borrowers qualify across a wide spectrum, based on strength of credit. Applicants with high credit scores and solid debt to income ratios are eligible for the best terms, for example, while those with prior credit difficulties do not necessarily land preferred interest rates. To protect themselves from loan default, lenders extend terms that help balance risk, matching interest rates with each applicant's creditworthiness. For borrowers seeking better interest rates, but without the strong credit to back-up their applications, the mortgage industry offers points. Discount points are only charged when borrowers strike deals with lenders, guaranteeing a lower rate on their mortgages. For the fee, the mortgage originator agrees to take on added risk, beyond standard underwriting concerns. Points are paid as a full unit, or as fractions of an interest rate point, ultimately establishing the rate of interest paid on the mortgage.
• Title Insurance/Settlement Services — Title companies work with lenders to finalize transactions, so the fees they charge are passed on to buyers. In addition to title services, lenders typically require title insurance, to protect them from claims against the property. The lender's title insurance premiums are paid by buyers, despite the fact many are also responsible for providing their own version of coverage. When settlement requires attorneys, their itemized charges are outlined in closing documents and passed to buyers for payment.
• Homeowner's Title Insurance — In order to protect the portion of a home's value not covered by the lender's title insurance policy, home buyers are commonly required to add their own coverage, alongside the lender policy. Unfortunately, buyers end up paying for both, distinct policies.
• Document Recording — Separate from title services, recording documents, like deeds, adds to the cost of settlement. These government recording charges are set by municipalities, so lenders have little discretion for waving them. When surveys are required to define property boundaries, charges are added to the buyers' closing obligations.

Related Closing Costs

In addition to lender fees and other costs of conveying real estate, buyers are responsible for certain recurring costs tied to the property. To ensure an equitable transition, the closing process accounts for expenses once paid by the seller, which will be transferred to the new property owner.

• Mortgage Interest — As ownership changes, the interest liability is calculated from the closing date, ensuring costs are divided between the old and new home owners. The buyer's share represents the interest due from the date of the closing, through the last day of the month. This sum is paid at closing.
• Homeowner's Insurance — Loans are not closed without property insurance in force. Hazard, fire and liability coverage are included in standard homeowner's premiums, which must be paid when finalizing real estate transactions. The amount paid depends upon the mortgage holder, but a reasonable percentage of the annual homeowner's policy premium will be billed at the closing table.
• Property Taxes — Like insurance, which is also held in escrow, taxes are accounted for during reconciliation. The city tax bill commonly represents a substantial portion of the overall cost to close.
• Private Mortgage Insurance (PMI) — Down payments worth less than 20% of the total sale price of a home create additional risk for lending organizations. As a result, lenders commonly call for private mortgage insurance to offset the consequences of default. If required, premiums are paid during closing, as part of the final settlement.

Mortgage financing is regulated to protect home buyers. As a result, hidden charges and unanticipated expenses are largely absent from legitimate real estate transactions. In addition to the customary charges listed above, some lenders add processing fees, administration fees and commitment charges to their mortgage estimates. However described, the costs must be clearly outlined prior to closing, empowering informed consumers to comparison shop for residential financing.

Through research and negotiation, committed mortgage seekers can trim costs, without sacrificing timely closing proceedings. And with standardized documentation in place, expectations and closing budgets are clearly defined. In total, closing costs commonly represent 2-5% of the value of a mortgage, depending upon the size of the loan and its terms and conditions. In some cases, the costs are rolled-in to the mortgage and paid over time, but it is more common for them to be paid out of pocket at a formal settlement meeting.

If you are in the mortgage market, use truth in lending to your advantage, shopping the best rates and services. In many cases, pre-existing customer relationships, with your bank or credit union, for instance, furnish workable resources. In practice, anticipating the cost of closing helps you determine what you can afford, so it is never too soon to account for the true cost of becoming a home owner.

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