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    Buying a home is still a huge part of the American dream. Nevertheless, to achieve this goal, your actions must be anchored in reality. Closing costs are one of the most commonly overlooked parts of purchasing a home.

    Unfortunately, many prospective homeowners fail to fully calculate closing costs and incorporate them into their home buying budget. However, by taking the time to research these costs now, you will avoid an unpleasant surprise later.

    Are you a prospective homeowner who is ready to learn about closing costs? Below we explain what closing costs include, how much closing costs are, and who pays closing costs.

    KEY TAKEAWAYS

    • The closing costs you pay can vary depending on the type of loan you take out and the specific agreement you make with the seller at closing.
    • In general, closing costs tend to range between 3%-6% of the home’s value.
    • Closing costs are paid by both the buyer and the seller, yet how much each pays depends on negotiation.

    What Are Closing Costs?

    In case you’re unfamiliar, closing costs are fees and expenses that are paid during the final stage of buying a home. They are labeled “closing costs” because these fees are separate from the price of the property and generally go towards third-parties such as real estate agents, brokers, lawyers, government agencies, and so on. However, these costs are necessary to complete the transaction.

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    Here are some examples of the types of expenses included in closing costs:

    • Appraisal fees
    • Attorney fees
    • Discount points
    • Loan origination fees
    • Title insurance
    • Title searches
    • Surveys
    • Taxes
    • Deed recording fees
    • Credit report charges
    • Homeowners insurance
    • Courier fees
    • Escrow deposits
    • Flood determination/monitoring fees
    • Lead paint inspections
    • Pest inspections
    • Prepaid interest
    • Underwriting fees
    • Transfer taxes
    • Lender fees (processing and underwriting)

    The amounts vary depending on the specifics of the loans, process, and property. Buyers should also note that the down payment for your home is separate from the closing costs.

    How Much Are Closing Costs?

    Closing costs are calculated based on several variables. However, generally speaking, closing costs tend to be about 3% to 6% of the total loan amount. So, for instance, if you get approved for a loan of $500,000, your closing costs will likely be between $15,000 and $30,000.

    Home buyers should be aware that closing costs can be negotiated. Also, just because certain fees are listed in the closing costs doesn’t make them legitimate. Although it’s relatively uncommon, predatory and fraudulent charges are always possible. Therefore, if you have questions or concerns about a fee, you have every right to request a reduction or clarification.

    Ultimately, closing costs can end up increasing the price of a home by a significant margin. However, you can take certain steps to cut down on closing costs and save money when buying a home. To reduce closing costs, you can do the following:

    • Compare mortgage companies: The lender you use will have a big impact on the closing costs you pay. Some lenders may charge more fees, while others charge less, thereby reducing the amount you pay in closing costs. Make sure to ask about what fees a lender will charge at closing as you shop around for a mortgage company.
    • Pay cash: This is not always possible, but if you can pay for your home outright, you can help reduce closing costs when buying a home. A cash offer also tends to be more attractive to sellers, so you can use this leverage to negotiate with the seller and get them to pay more of the closing costs.
    • Don’t purchase discount points: Another way to lower closing costs is by skipping the discount points. However, you will need to decide if you prefer lower upfront costs or lower interest rates.
    • Say no to mortgage insurance: If you have a traditional mortgage and make a down payment of at least 20%, you avoid paying mortgage insurance and save money.

    While the options listed above can lower closing costs, keep in mind that these aren’t the best options for every buyer. Sometimes rolling certain expenses into closing costs and paying more upfront can help save you money in the long run. If you’re not sure what the best route is for your situation, consider reaching out to your lender for advice.

    How much a buyer pays in closing costs can also be impacted by the type of loan you’re using. Some government-backed loans, for example, place limits on the amount a borrower can pay in closing costs. Below we take a closer look at how different types of home loans can impact your closing costs:

    VA Loan

    VA loans are loans that are backed by the Department of Veterans Affairs. The best feature of this loan is that it doesn’t require mortgage insurance or a down payment.

    At the same time, another key feature of VA loans is that they place caps on closing costs the buyer has to pay. For example, VA loans require sellers to cover the following closing costs:

    • Commission charged by real estate professionals
    • Brokerage fee
    • Buyer broker fee
    • Termite report (for purchase loans only)

    Additionally, buyers using a VA loan can’t be charged more than 1% of the total loan amount for a lender’s origination fee.

    If you take out a VA loan, one downside when it comes to closing costs is the VA funding fee. The VA funding fee is paid by all borrowers in the VA program (unless you’re exempt) and ranges from 0.5% to 3.3% of the total loan amount depending on the type of VA loan you’re using and how many times you’ve used the VA benefit in the past.

    FHA Loan

    FHA loans make it easier for first-time home buyers to purchase a home because they only require a down payment of 3.5%. This significantly reduces the upfront costs associated with buying a home. However, buyers using FHA loans will typically pay a similar amount in closing costs that they would with other loan types, in addition to an upfront mortgage insurance premium.

    Buyers who take out FHA loans are required to pay mortgage insurance premiums (MIP) regardless of the size of their down payment. At closing, buyers will have to finance or pay 1.75% of the loan amount for upfront MIP, and then pay an annual MIP charge for the life of the loan.

    USDA Loan

    USDA loans can make homes in rural areas more affordable because, with this loan type, buyers don’t need to put any money down. USDA loans also don’t require mortgage insurance, but they do require a closing cost called a “guarantee fee”. The guarantee fee is equal to 1% of the loan amount and borrowers can either pay it upfront or finance it at closing.

    Who Pays Closing Costs?

    Who pays closing costs depends on the unique details of the agreement. However, both buyers and sellers typically pay some closing costs. Just as with the price of the home, the amount of your closing costs may be subject to negotiation. Moreover, with most home loans, the buyer pays most of the closing costs.

    Either way, sellers commonly pay closing costs such as prorated real estate taxes, transfer taxes, home warranty fees (if one is offered), association fees (if applicable), and real estate agent commissions. So, if you notice that you are asked to pay those costs, you should find out why. Depending on how you negotiate the sale, the seller may also make other concessions and take on more closing costs. If you are refinancing your home, on the other hand, you will usually have to pay all closing fees.

    How Much Are Closing Costs for a Buyer?

    A smiling man and woman sit opposite from their realtor and look over a document together.

    No matter how skilled you are at negotiation or what type of loan you choose, you will still have to pay some closing costs. Here is a breakdown of the most common closing costs for buyers:

    Application fee

    Application fees are charged by lenders. Since most buyers use home loans, this is one of the most common closing costs for buyers. These fees vary by lender and can be up to $500. Application fees can be assessed upfront or separately from other fees.

    Attorney fees

    Attorney fees are paid directly to a real estate attorney to help draw up relevant contracts and facilitate the purchase. These fees can vary widely depending on the attorney you choose and how much negotiation and paperwork is involved.

    Credit fees

    Credit fees are fees used to cover pulling your credit report and reviewing the credit score. Typically, these fees are minimal, as the average cost is between $10 to $100.

    Discount points

    Buyers can purchase discount points at closing to reduce their interest rate, which can lower how much it costs to pay off your mortgage and your monthly payments. However, discount points do increase your closing costs. As you weigh whether or not you should buy discount points, you’ll have to determine if paying a higher cost upfront is worth a lower rate and reduced mortgage payments over the life of the loan.

    Home appraisal fees

    Home appraisal fees are assessed by the lender to determine how much the property is worth. This is done to determine how much the bank can get for selling your property if you default on the loan. These fees may be separate or included in the cost of the loan.

    Home inspection fee

    Similar to appraisal fees, home inspection fees are used to determine the property’s condition. These fees are used to pay a company to ensure the home is in good condition and worth the investment. Home inspections can uncover hidden issues such as water damage, termites, mold, electrical damage, and more.

    Homeowners Insurance

    Homeowners insurance is both for the buyer and lender. On the one hand, homeowners insurance covers the property from certain types of damage. On the other hand, lenders require homeowners insurance to prevent a situation that results in a substantial or total loss on the property.

    Lenders often require at least a year’s worth of homeowners insurance to be paid before closing. This is how lenders ensure you are prepared to incur such a cost. The general rule of thumb for homeowners insurance is $50 monthly for every $100,000 of the cost of the home. So, if your home is worth $500,000, you may end up paying around $250 monthly for home insurance.

    Mortgage Insurance

    If you take out a conventional loan and your down payment is less than 20%, you may be required to purchase mortgage insurance. This will typically incur an upfront cost that will increase your closing costs, as well as a monthly premium that you’ll pay until you build at least 20% equity in your home.

    Origination fee

    The origination fee is a fee paid based on the value of the loan. This fee is paid to secure the loan. It is usually a flat fee between 0.5% and 1% of the property’s value.

    Property taxes

    Property taxes are fees paid to the local government in exchange for certain governmental services. These fees cover fire departments, infrastructure, public schools, and more.

    Title fees

    Title fees are paid to attorneys or title companies. This fee pays for a title search, which is a review of a home’s ownership records undertaken to ensure the seller actually owns the home. Additionally, title insurance helps protect the buyer and lender in case of a dispute.

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    Calculate Closing Costs to Effectively Budget for a Home

    Overall, closing costs can be complicated. Nevertheless, calculating them is essential to a smooth home buying process. These fees vary depending on the type of loan, services required, and whether you prefer to pay more upfront or over time.

    At Griffin Funding, we make the home buying process as transparent as possible, so that you won’t be shocked by any undisclosed closing costs as you prepare to buy your home. Additionally, we offer competitive rates and excellent customer service, which makes buying a home as stress-free as possible. Get in touch with our team today to find a loan that aligns with your homeownership goals.

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 21 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up important with changes in the industry to deliver the most value to Griffin's clients.