- Mortgage closing costs cover everything from appraisal fees, to survey fees, to title insurance.
- You’ll probably pay thousands in closing costs, but shopping for lenders and negotiating will help you pay less.
- State governments and some lenders offer loans or grants to help with closing costs.
- See Insider’s picks for the best mortgage lenders »
Closing costs are fees you pay when you buy a home. Some go to your lender, while others pay third-party vendors like appraisers and attorneys.
Closing costs are separate from your down payment. When you budget for buying a home, you’ll need to factor in a down payment, closing costs, and the amount of money you want to have left in savings after closing.
The term “closing costs” doesn’t just refer to a lump sum you pay for closing on the home. Each dollar goes toward a specific expense. Here are some of the most common closing costs:
- Application fee: You’ll pay for the lender to process your application and check your credit score.
- Loan origination fee: This also may show up as an underwriting or processing fee. It’s a charge for putting together the terms of your mortgage.
- Appraisal fee: An appraiser assesses the value of your home for your lender.
- Inspection fee: An inspector looks at the home on your behalf so you can know of any issues before deciding to close.
- Mortgage insurance: If you place less than 20% down on a conventional mortgage, you’ll pay for private mortgage insurance. You can pay for PMI monthly, in full at closing, or a combination of the two. FHA, VA, and USDA mortgages each have their own types of insurance and funding costs.
- Attorney review/closing fee: Depending on which state you live in, you might be required to have a lawyer present at closing. Or you may just want an attorney for your own peace of mind.
- Homeowners insurance: You’ll probably pay for homeowners insurance monthly. But many lenders require you to pay a certain amount — maybe a year’s expenses — at closing.
- Property taxes: As with homeowners insurance, you’ll pay property taxes monthly once you buy the home. But you’ll probably have to pay a certain amount of property taxes upfront.
- Title search fee: You’ll pay for an expert to track down the seller’s title to ensure they actually own the home.
- Title insurance: You might pay for both the lender’s title insurance and owner’s title insurance. The lender’s insurance protects the company in case there’s an issue in the title search process. The owner’s insurance, which is optional, protects you if problems arise.
- Survey fee: You may have to pay for someone to survey the land.
- Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your new mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5% and you pay $4,000 for two discount points, your new interest rate is 3%.
- Prepayment penalties: This could be a closing cost if you’re refinancing. A mortgage prepayment penalty is a fee you pay the lender if you sell, refinance, or pay off your mortgage within a certain amount of time of closing on your initial mortgage — usually three to five years.
This isn’t necessarily an exhaustive list. Depending on the lender, you may see other closing costs on your list of fees.
According to the Closingcorp, the average mortgage closing costs in 2020 were $3,470 without taxes and $6,087 with taxes.
You’ll also pay closing costs when you refinance, though some of the individual fees will vary. Refinancing closing costs typically come to 3% to 6% of your loan principal, according to the Federal Reserve. That’s $3,000 to $6,000 for every $100,000 borrowed.
Shop around for lenders
Choose your top three or four lenders and ask each for a loan estimate, which is an itemized list of fees that make up your closing costs. You’ll be able to compare how much you’d pay with each lender. Ideally, you’ll find a lender that charges relatively low fees and a low interest rate.
Ask the lender if you can waive or pay less on lender fees, such as the application fee or origination fee.
You’ll have to pay fees that go toward third-party vendors like the appraiser and home inspector. But the amounts on the loan estimate are likely for the lender’s preferred vendors — meaning you don’t necessarily have to use that company. You can look for other vendors that charge less.
Get a no-closing-cost mortgage
With a no-closing-cost mortgage, you buy or refinance but don’t have to pay the usual closing costs when you close on the loan.
This type of refinance helps you save money at closing, but you’ll still pay the money over time. The lender either charges you by rolling closing costs into the principal or by charging you a higher interest rate.
Look into homebuyer assistance programs
Ask a lender if it has any grants or loans to help with closing costs. For example, the Chase DreaMaker mortgage is a loan for lower-income borrowers that includes up to $5,500 in grants you can use for a down payment or closing costs. Bank of America has a down payment/closing cost assistance program that varies by state.
If your top lenders don’t have any assistance programs, search for loans and grants in your state. Each US state has program for first-time homebuyers who qualify.
About the author
Laura Grace Tarpley is an editor at Personal Finance Insider, covering mortgages, refinancing, and lending. She is also a Certified Educator in Personal Finance (CEPF). Over her five years of covering personal finance, she has written extensively about ways to navigate loans.
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