When you’re saving to buy a home, the down payment tends to get most of the attention. But there’s another expense homebuyers should plan for: closing costs.
If you’ve been wondering what closing costs are, how much they cost, or what you’re actually paying for, you’re not alone.
Understanding mortgage closing costs ahead of time can help you budget more accurately and avoid surprises as you approach closing day.
What Are Closing Costs?
Closing costs are the fees and expenses associated with finalizing your mortgage and transferring ownership of a property.
These expenses are separate from your down payment and generally cover services required to complete the home purchase and financing process.
Closing costs vary depending on the loan program, lender, property location, and details of the transaction.
How Much Are Closing Costs on a House?
As a general guideline, closing costs often range from approximately 2% to 5% of the home’s purchase price, excluding your down payment.
For example, on a $350,000 home, that could mean approximately $7,000 to $17,500 in closing costs.
This is only an estimate. Actual costs may be higher or lower depending on the transaction, local taxes, and other factors.
Your lender will provide a Loan Estimate that outlines anticipated mortgage costs so you can better understand what to expect.
What Is Included in Mortgage Closing Costs?
Closing costs can include several different types of fees.
Loan Origination Charges
These are charges associated with processing, originating, or underwriting your mortgage, depending on the lender’s fee structure.
Appraisal Fee
An appraisal provides an independent opinion of the property’s value.
Lenders often require an appraisal to help confirm that the property’s value supports the mortgage amount.
Title Services and Title Insurance
Title services help identify potential ownership or lien issues associated with the property.
Title insurance can provide protection against certain covered title-related problems.
Government Recording Fees and Transfer Taxes
State and local governments may charge fees to record property ownership documents and mortgages.
Transfer taxes may also apply, depending on the property’s location and applicable laws.
Prepaid Expenses
Some expenses are collected in advance at closing.
These may include homeowners insurance premiums, prepaid mortgage interest, and certain property tax amounts.
Initial Escrow Deposits
If your mortgage includes an escrow account, you may need to deposit funds at closing to help cover future property tax and insurance payments.
Are Closing Costs the Same as Your Down Payment?
No. Your down payment and closing costs are two separate expenses.
Your down payment is the portion of the home’s purchase price that you pay upfront.
Closing costs cover the services, fees, and other expenses involved in completing the purchase and mortgage transaction.
Both are important when calculating how much money you’ll need to buy a home.
Can Closing Costs Be Reduced?
Depending on your situation, there may be ways to reduce the amount you pay out of pocket at closing.
Seller concessions: In some transactions, the seller may agree to contribute toward eligible closing costs, subject to the purchase agreement and loan program limits.
Lender credits: Some lenders may offer credits toward closing costs, typically in exchange for a higher interest rate.
Down payment and closing cost assistance: Eligible homebuyers may qualify for state, local, or other assistance programs that help cover certain upfront expenses.
It’s important to understand the terms and long-term costs of any assistance or credit before deciding which option makes sense.
How Will You Know Your Final Closing Costs?
After applying for a mortgage, you’ll generally receive a Loan Estimate outlining your projected loan terms and closing expenses.
Before closing, you’ll also receive a Closing Disclosure showing the final loan terms, closing costs, and cash needed to complete the transaction.
For most mortgages, the Closing Disclosure must be received at least three business days before closing.
Reviewing these documents with your loan officer can help you understand the numbers and ask questions before signing.
Plan Ahead with First Home Mortgage
Closing costs are an important part of buying a home, but they don’t have to catch you off guard.
At First Home Mortgage, our loan officers can help you understand the expenses associated with your mortgage and explore financing options that align with your budget.
Preparing to buy a home? Connect with First Home Mortgage to learn more about closing costs and what to expect throughout the homebuying process.
