For most people, buying a home is daunting. After all, real estate transactions are usually a once- or twice-in-a-lifetime experience so there's little hands-on opportunity to become intimately familiar with the process. You'll have mountains of paperwork to sign, industry jargon to decipher, and a host of fast-talking salespeople—from real estate agents to mortgage brokers—to contend with.
Somewhere between the elation of purchasing property and the boredom from signing forms, it’s easy to lose track of what you’re paying for and how much you’re spending. Aside from the mortgage, most other expenses get lumped into a category called “closing costs.” Paying attention to these costs before you get to the closing can help you understand where your money is going and maybe even save you a few hundred dollars.
- Recurring closing costs are expenses that you pay at closing and each month thereafter, such as real estate taxes.
- Nonrecurring closing costs are one-time payments, such as points, loan fees, and home inspection fees.
- Be on the lookout for these five “junk fees”: excessively high application, underwriting, mortgage rate lock, and loan processing fees, as well as broker rebates.
- Some lenders offer an all-in-one flat-rate fee that covers all closing costs, saving you from worrying over the fairness of each fee individually.
Closing Costs: What Are They?
The term “closing costs” is shorthand for the total cost of several dozen potential expenses associated with purchasing and financing real estate. These expenses can be categorized as “recurring” and “nonrecurring.”
Recurring costs are paid at closing and monthly thereafter. These include real estate taxes, homeowners insurance, and—if you’re putting down less than 20% of the purchase price—private mortgage insurance (PMI), which you will want to avoid paying if possible. (The Consumer Financial Protection Bureau (CFPB) offers advice on PMI and how to get it removed.)
These expenses must be funded in advance at the time of purchase, which is done by putting funds into an account to cover the next year’s obligations. This is known as “putting the money in escrow.” Depending on your closing date, it may also be necessary to prepay interest to cover your first few days or weeks in the home.
Nonrecurring costs are also paid at closing. They may include:
- An application fee (profit for the lender)
- A series of loan fees (these may include an origination fee, an appraisal fee, a credit report fee, a tax service fee, an underwriting fee, a document preparation fee, a wire transfer fee, office administration fees, et al.),
- A broker’s service fee (if you are working with a mortgage broker)
- Any lender-required home inspections (e.g., pest inspection)
- The cost of a lender-required home appraisal (in which someone is paid to verify that the property is worth at least as much as the selling price)
Other Costs at Closing
Closing costs may also include:
- Federal Housing Administration (FHA) fees
- Veterans Administration (VA) fees
- Rural Housing Service (RHS) fees associated with mortgages guaranteed by the government
- A flood determination fee to investigate whether the property is in an area prone to flooding
- A land survey to verify the property’s boundaries
- Title charges (which may include a title settlement fee, title search fee, title examination fee, closing service letter fee, deed preparation fee, notary fees, title insurance fee, and any attorney’s fees)
How Much Are Closing Costs?
Fees vary widely based on the lender, the geographic location of the property, and the price of the home. Consult “Your Home Loan Toolkit,” prepared by the Consumer Financial Protection Bureau, as a guideline when evaluating fees. Business Insider has also broken down average closing fees by state in 2019; referring to its chart can give you a benchmark, depending on your home’s location.
What Are ‘Junk’ Fees?
Garbage fees, also known as “junk fees,” are tacked on to most mortgages. There is no way to completely avoid them, but you can often minimize them.
Look out for excessive processing and documentation fees in the following five categories:
- Application fee
- Underwriting fee
- Mortgage rate lock fee
- Loan processing fee
- Broker rebate
If any of these fees seem to be unusually high, ask about them, as they can often be negotiated. This advice also applies to other fees. If it looks funny, ask about it. Often the mere act of questioning the fee will result in the fee being lowered or eliminated.
If you think a fee is too high, try to negotiate it downward. Often simply questioning a fee will get it reduced or eliminated.
All-In-One Closing Cost Pricing
Realizing that consumers are overwhelmed by fees and frustrated at the process of trying to determine whether the fees are fair, some lenders now offer an all-in-one, flat-rate fee that includes all closing costs. The “all-in-one” terminology is also used to describe other mortgage products, such as mortgages that are tied to checking accounts. Take care when shopping for these products, making sure that you purchase the one that applies strictly to mortgage closing costs and not to other banking relationships or products.
As a general rule, you can expect to spend from 3% to 6% of the purchase price in closing costs.
Minimize the Pain
If the real estate market in your area is favorable to buyers, you may be able to ask the seller to pay closing costs. If that isn’t an option, getting an all-in-one mortgage is probably the best way to minimize the feeling that you are being taken advantage of during the closing process. While you are still paying the fees, you won’t need to despair over them one fee at a time.
Comparison shopping is another way to get comfortable with the process and get a better feel for the costs. Ask half a dozen lenders to provide loan estimates and compare the results. This will help you learn the terminology and get a sense of the range of closing fees in your area. Once you choose a lender and have a loan estimate in hand, save it. It will come in handy later.
The Bottom Line
The official form that includes a breakdown of all closing costs is called a “closing statement” or “closing disclosure.” You have a right to see this document at least three business days in advance of closing. Request it and compare it with the loan estimate. If the numbers aren’t reasonably close, ask questions.
By spending the time to comparison shop and carefully review all documentation in advance, you can minimize the expense and anxiety associated with the closing costs you incur when purchasing real estate.