What Are Closing Costs and How Much Are They?

When it comes to buying a home or refinancing a mortgage, there's more to consider than just the price of the property or the interest rate. Enter: closing costs. In the context of real estate, closing refers to the final stage of a property transaction where ownership of the property is transferred from the seller to the buyer. The costs associated with this process, collectively referred to as closing costs, are essentially the fees and charges that facilitate this transfer of ownership.

As a homebuyer, think of closing costs as the final step in your homebuying journey. When you purchase a home, a lot of work happens behind the scenes to ensure the process goes smoothly. This includes checking your credit, appraising the home to confirm its value, conducting a title search to make sure no one else has a claim to the property, handling the paperwork to legally transfer the property to you and more. Each of these services comes with a fee, and when combined, they're known as closing costs.

Closing costs are one-time fees paid at the end of the homebuying process or at closing. Depending on the real estate market and your negotiations with the seller, the seller might agree to cover a portion of these closing costs. This can significantly reduce the amount you'll need to bring to the closing table.

On average, closing costs range from 2% to 5% of the home's purchase price. If you're buying a home priced at $300,000, your closing costs may be between $6,000 (2%) and $15,000 (5%). The exact amount will depend on several factors, including the property's location, the type of mortgage and the particulars of your agreement with the lender and seller.

According to ClosingCorp, a well-known provider of residential real estate closing cost data, the national average closing costs for a single-family property in 2021 were $6,837 including taxes and $3,836 excluding transfer taxes. By state, the District of Columbia incurred the highest average closing costs including taxes at $29,888, followed by Delaware at $17,859. Missouri, on the other hand, had the lowest average closing costs including taxes at $2,061.

Closing costs encompass a range of services and processes that help facilitate the transfer of property from seller to buyer. These costs typically include:

• Origination Fee: Think of this as a processing fee for your loan. It covers administrative work, like application processing and underwriting, charged by your lender.

• Discount Points: This is an optional charge you can pay to lower your interest rate. Essentially, you're buying down your rate — a strategy that might make sense depending on how long you plan to own the home.

• Appraisal Fee: This pays for a professional estimate of the home's market value, ensuring that the lender isn't loaning you more money than the property is worth.

• Credit Report Fee: This is how the lender covers the cost of accessing your credit history data to evaluate your creditworthiness. Note that your lender will likely make a hard inquiry, which may affect your credit score.

• Title Search and Insurance Fee: This two-part fee includes a deep dive into public records to ensure no one else has a claim to your property and an insurance policy that protects your ownership rights.

• Survey Fee: In some cases, you'll need to confirm property boundaries. This fee covers the cost of that verification.

• Home Inspection Fee: A professional home inspection can uncover hidden problems with a property. The cost for this service often falls under closing costs.

• Pest Inspection Fee: Depending on where the home is located, you may also need a separate inspection to check for bugs and pests.

• Escrow Deposit: This is where you prepay some of your property taxes and homeowners insurance into an escrow account.

• Prepaid Interest: This covers the interest that will accrue from the time you close the deal to when you make your first mortgage payment.

• Property Tax: Typically, you'll need to cover property taxes from the day you become the homeowner.

• Homeowners Insurance: Lenders generally require you to secure and prepay the first year's home insurance premium at closing.

• Recording Fees: Your city or county government will charge a fee to officially note the change in property ownership.

• Underwriting Fee: This fee compensates the lender for the work of researching and verifying your ability to repay the loan.

• Flood Determination and Monitoring Fees: These cover the cost of determining whether the property is in a flood zone and keeping track of any changes.

Ultimately, closing costs vary based on location, the type of loan, the property itself and even the time of year. Understanding these fees and planning for them can help you budget wisely and ensure a smoother homebuying process.

Planning for closing costs involves a series of steps, from conducting your own research to negotiating with the seller.

Budgeting for closing costs is essential in the homebuying process because these additional expenses can add up to a significant amount. If you don't account for these costs in your budget, you could find yourself short on funds at a crucial moment in the buying process.

The financial impact of closing costs is twofold. First, they directly affect how much money you need to close the sale. Second, they indirectly influence your budget for other expenses related to your new home. If you have to put more money toward closing costs, you might have less to spend on moving expenses, home improvements, furniture or emergency savings for unexpected home repairs.

Navigating the homebuying process can be complex, and closing costs are often misunderstood. Below, we debunked some common misconceptions about closing costs.

We answered some commonly asked questions about closing costs to help you better navigate your homebuying journey.