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What Are Closing Costs?

Buying a house can feel like a long slog! From the viewings to getting your ducks in a row through to closing day, it’s all pretty stressful. And then there are the closing costs . . .  

Wait a second. What closing costs? These fees can be a nasty surprise if you’re not up to speed —especially if you’re new to it all as a first-time buyer.  

But that’s where we can help. It’s good to have an idea of who and what you’ll be paying on closing day, whether you’re the buyer or the seller.

Where to start, though? We’ve got it covered.

What Are Closing Costs?

Simply put, closing costs are the fees the buyer and seller of a home pay to various third parties on closing day to finalize the deal.  

If you’re the buyer, closing costs check off two boxes: fees that have do with owning your new home and fees that go to the folks who are lending you all that cash to buy it! What you pay in closing costs depends on the state where you’re about to buy a home and the fees set by your mortgage lender.   

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If you’re the seller in this deal, your closing costs will cover (among other things) the fee to transfer the title of the house to the buyer and the real estate agent’s commission. More on that later.

How Much Do I Pay for Closing Costs?

If you’re buying a house, expect to pay anywhere between 2% and 5% of the purchase price in closing fees.1 

Keep in mind that closing costs vary from state to state, too. Each state has its own laws concerning real estate deals and property taxes. For example, closing costs in New York and Connecticut are higher than those in Kentucky or Pennsylvania.

What Are the Closing Costs for a Buyer?

Let’s say your intended new home costs $250,000. You’ll pay between $5,000 and $12,500 in closing costs.2 Yikes!

But don’t worry. Closing costs don’t have to be a surprise if you know what to expect. Here are the main types of closing costs you’ll come across when you’re buying a house.

Home Inspection Fee

You should get this one out of the way before closing day. A home inspector checks the condition of the entire house and flags any issues so you can raise them with the seller. Then give them time to make the agreed repairs before closing day.

How much does it cost? About $300-$500, depending on size of the house.3

Application/Processing Fee

This fee covers the cost to your lender for processing your mortgage application. It deals with things like running a credit check and pulling your credit score, along with other processing jobs.

How much does it cost? About $300.4

Origination Fee

Mortgages come with lots of paperwork! An origination fee covers the lender’s costs of creating a mortgage for you and processing all that paperwork so you can get your loan in time.

How much does it cost? About 1% of the total amount of the loan.5 

Prepaid Interest on Your Mortgage

On closing day, you’ll pay the interest portion of your monthly mortgage payment, covering the period between your closing date and your first scheduled mortgage payment. Tip: Close toward the end of the month so you’ll only pay a few days’ worth of interest compared to a few weeks’ worth if you close at the beginning of the month!

How much does it cost? Calculated by when your closing day lands in the month.

Appraisal Fee

This is a fee to a third-party company to determine the value of the house you’re about to buy. They’ll make sure it isn’t wildly overpriced or underpriced in the current housing market.

How much does it cost? Anywhere between $300 and $500.6

Tax Service Fee

If not already covered in the application fee, you’ll pay a fee to a third party to confirm that you pay your taxes on time and don’t have any unpaid taxes.

How much does it cost? About $50.7

Private Mortgage Insurance

You’ll have to pay private mortgage insurance (PMI) if your down payment is less than 20% of the price of the home. That’s why we recommend you put down at least a 20%! And it’s due every month in your mortgage payments. In a nutshell, it’s insurance that keeps your lender from losing money if you default on your mortgage and can’t keep up the monthly payments. On closing day specifically, you’ll pay one months’ worth of mortgage insurance upfront.

How much does it cost? Varies, depending on the lender.

Homeowners Insurance Premium

This one is required by law. And on closing day, you’ll pay to cover the first year of your home insurance premiums.

How much does it cost? Average annual cost of home insurance is about $1,000.8

Property Taxes

Each state makes their own property tax laws. So if you buy a house in a state with high property taxes, you’ll pay more on closing day than average. And be prepared to pay a few months’ worth of property taxes up-front. This (along with your payment for the home insurance) will be held in your escrow account.

How much does it cost? It depends on the tax laws in your state. In states with high property tax (like New York or New Jersey) this figure could be thousands on closing day.9

Homeowner's Association Fees

If you’re buying a home in an community with a homeowner’s association (HOA), you’ll pay a process fee to set up your membership on closing day. Then, each month, you’ll pay HOA fees to maintain your membership.

How much does it cost? Around $200 to process, but varies by HOA.10

What Are the Closing Costs for a Seller?

Now, don’t think sellers get off any easier. Selling a house comes with closing costs, too! The biggest chunk of your payment on closing day is the commission fee for the real estate agent.

Real Estate Commission Fee

This fee is split and shared between the listing agent (who’s responsible for putting the seller’s house on the market) and the buyer’s agent (who represents the buyer and all their interests).

How much does it cost? The average commission rate is 6% of the sale price of the home. So if the house goes for $250,000, the commission would be $15,000.11 

Transfer Tax Fee

The seller usually pays the costs of transferring the title of their home to the new owner. There may also be additional title fees or recording fees based on the title company.

How much does it cost? Depends on which state you live in.

Attorney Fee

If you’re selling your home and use an attorney to assist you, their fees will be due on closing day, too.

How much does it cost? Varies, depending on the attorney used.

When Do I Find Out My Closing Costs?

The good news is you won’t be slapped with a huge bill on closing day without any notice!

You’re actually given an estimate of your closing costs by your mortgage lender early on in a document called a loan estimate. The loan estimate also contains a breakdown of how much your mortgage payment will be every month and what it covers.   

And then, at least three business days before closing, your lender is required by law to send you a closing disclosure. This form lists all the final terms of your loan (including closing costs) and the details about who pays and receives money on closing day.

It’s super important to look over the closing disclosure and compare it with your loan estimate. If something doesn’t match up, now’s the time to ask your lender why.

Make sure you’re working with a mortgage lender who takes the time to explain everything to you and answer any questions you may have. The mortgage experts at Churchill Mortgage can help you calculate the costs and show you how to purchase a home the smart way, saving the most money over the life of the loan.

Can I Save Money on My Closing Costs?

This is the question everyone wants answered! And if you don’t ask, you’ll never know! When you’re looking at mortgage lenders, why not ask them if there’s any wiggle room to reduce their closing fees?

And don’t feel shy about asking the seller, either. If they’ve been trying to sell their house for months and want a quick sale, you might get them to agree to pay a small fraction of your closing costs because you hold the upper hand in the deal. 

Keep on Top of Closing Costs With a Real Estate Professional!

Don’t try to navigate the world of home buying or selling alone, especially closing costs. If you’re looking for a new home you need a qualified real estate professional to take you through the process, from viewing to closing. You’ll find these pros right here in our Endorsed Local Provider (ELP) program.  ELPs have the expertise to get you the best deal while saving you time and money at the same time.  

Our ELPs have earned Dave’s recommendation and have high standards of customer service. Find your agent today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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