What Are Closing Costs For A Mortgage And How Much Are They?
What Are Closing Costs For a Mortgage and How Much Are They?
When buying a new home, many people focus on how much of a down payment they'll need to secure a mortgage. But you also need to factor in the additional expenses that come with the transaction -- including closing costs.
Closing costs refers to the assortment of fees you must pay to your mortgage lender when closing on your home. They're due when you finalize your mortgage and take over the property title. They usually range from 2% to 5% of the amount you're borrowing, and will add up to thousands of dollars. Most are paid by the buyer, but the seller may be on the hook for a few charges, too.
Closing costs can be significant and should be included in your homebuying budget. Here's everything you need to know about closing costs, how much they will cost you and how to avoid any last-minute surprises when closing on your new home.
What are mortgage closing costs?
Closing costs refer to the upfront fees charged to secure a loan and transfer the ownership of a property, according to the Consumer Financial Protection Bureau. Sometimes they're referred to as settlement costs.
They cover a lot of behind-the-scenes transaction costs that your realtor, bank, title company, appraisers and document-drafting lawyers all need to be paid. Some common closing costs include title insurance, government taxes, appraisal fees, tax service provider fees and prepaid expenses, according to a list published by the Consumer Financial Protection Bureau.
The buyer usually ends up paying most of these costs -- but standard arrangements vary among states and from deal to deal. Sometimes, a buyer can negotiate to have the seller pick up some of the closing costs in exchange for a higher overall sale price, though in the current competitive housing market most buyers are picking up their own closing costs. Buyers may also have a lender chip in on closing costs, but that could result in a higher loan amount or interest rate.
What do closing costs pay for?
Your closing costs will depend on your particular transaction and can be impacted by interest rates, local insurance fees, tax rates, local appraisal fees and other factors. But here's a general breakdown of some of the common expenses covered by closing costs:
Title insurance: This protects lenders from financial losses stemming from problems related to a property title, such as liens or ownership conflicts.
Taxes: These could include the property tax on the home, local government fees -- such as one for recording the sale of the property -- and a tax for transferring the title from the seller to the buyer.
Appraisal fees: These are charged by an appraiser for coming to the property and assessing the home's value to determine an appropriate loan amount.
Tax service provider fees: These help pay for third parties to keep track of property tax payments and other tax monitoring duties.
Prepaid expenses: These are items like homeowners insurance, property taxes and interest until the first payment is due.
How much are closing costs?
Most lenders and industry watchers will tell you that your closing costs, on average, will cost you somewhere between 2% and 5% of the amount borrowed.
The national average closing costs for a single-family property were $6,905 in 2021, according to ClosingCorp, which analyzes closing cost data for the industry.
For a more specific estimate, we used a closing cost calculator from banking service BBVA 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 at $7,042.
What are closing documents?
One of the key documents you'll get before the final signing is the closing disclosure, which outlines the details about your loan, including your closing costs. The lender should provide you with that document three business days before the scheduled loan closing.
It's important to review this document to make sure all the information is correct and that the terms of the loan are accurate and clear. This closing disclosure explainer can help you as you review the document. You want to make sure your closing costs match the most recent loan estimate.
Other important closing documents include:
Promissory note: A legal document stating that you will repay your mortgage.
Mortgage, security instrument or deed of trust: Gives the lender the right to take your property by foreclosure if you do not pay your mortgage according to the terms you've accepted.
Initial escrow disclosure statement: Details the charges that you pay into an escrow each month.
Right to cancel form: Outlines the rules for when and how you can cancel your loan, usually used as part of the refinancing process.
If you have questions about any of these, ask your lender, broker, or lawyer for help.
Are closing costs tax deductible?
The only closing costs you can deduct are the points you pay to reduce your mortgage interest rate and real estate taxes you're required to pay upfront, according to the IRS. If you itemize, you can deduct these costs during the year you buy your home.
The IRS also has a list of closing costs you can add to the basis of your home. They include things like legal fees, recording fees and surveys. Tax rules are always changing, which is why we advise talking to a tax professional about what you can and can't deduct from the closing of your house.
Tips and tricks for saving on closing costs
Saving all your cash for the down payment is a home buying mistake to avoid. Closing costs will run you thousands of dollars on top of your down payment, so you need to be prepared to save for them too.
"In a seller's market, we have offered to reimburse borrowers for their appraisal cost, have a network of title companies that will reduce title fees and provide grant programs for qualifying borrowers to cover down payment and some closing costs," says Steve Twyman, branch manager with Mortgage Experts. "There are options for lender credits as well."
It never hurts to ask the seller to pay for closing costs. "This is a common occurrence so don't feel shy about asking for this. Remember the worst that can happen is they can say no," says Orlando Miner, principal at Miner Capital Funding, LLC.
But again, this will be harder to negotiate when it's a seller's market, as it is right now in many regions of the US.
Keep in mind, the timing for closing on your house is also important because closing at the end of the month will save you on prepaid interest. "You have to pay prepaid interest from the date you close to the end of that month," says Miner. "So the closer you close to the end of the month, the less money you pay."
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