Finance

All You Need to Know About Home Loan Closing Costs

Closing costs might be an unwelcome surprise after saving for a down payment, house hunting, and applying for a mortgage. Understanding what exactly these costs cover and budgeting for them will make the last stages of the home-buying process go more smoothly.

What Are Closing Costs?

Closing costs, also called closing and settlement fees, are the fees that are collected by the various parties who are involved in the purchase and sale of a property. These include your lender, who will collect an origination fee; your real estate broker, who may take a commission; and title companies and escrow agencies, which collect a fee for performing necessary legal services. Most closing fees are paid by the buyer and not the seller.

How Much Should You Expect to Pay?

Typical closing expenses for home buyers range between 2% and 5% of the loan amount. That means that closing expenses for a $300,000 home would range from $6,000 to $15,000.

Paying your closing costs on your own is the most cost-effective approach to cover them. If the lender allows it, you may be able to finance them by incorporating them into the loan, but you would pay interest on those charges throughout the life of the mortgage.

When purchasing a home, you can shop around and negotiate some of the fees to reduce your closing costs. In addition, several governments, counties, and towns provide low-interest financing programs or grants to first-time home buyers to assist with closing costs.

List and Estimate of Closing Costs

Appraisal fee: $300 to $400

Application fee: Varies based on the lender’s terms and conditions

Home inspection fee: $300 to $500

Attorney’s fee: Varies but is charged on an hourly basis

Origination fee: About 0.5% of the loan amount

Prepaid interest: Based on the total loan amount

Discount points: 1 point typically costs 1% of the loan amount

Mortgage broker fee: Between 0.50% to 2.75%

Upfront mortgage insurance: Between 0.55% and 2.25%

FHA, USDA, and VA fees: Between 1% and 3.3%

Homeowners insurance: Premiums depend on the home’s value, location, and other factors