Closing costs on a house are additional fees and expenses that can add up to thousands of dollars. See what they are and how to lower them.
What are closing costs on a house? They're charges related to your home purchase, such as the appraisal fee and title fee, and they typically total 2-5% of your home loan amount.
The closing costs on a house can add thousands of dollars to your home purchase. But unfortunately, many homebuyers forget to include them in their budgets.
Some buyers go into a purchase thinking the down payment will be their only upfront cost. In other cases, buyers know they should expect closing costs, but they don’t know exactly how much they should expect to pay. And for low-income homebuyers, closing costs can jeopardize their ability to buy a home at all.
In this article, we’ll clear up some of the confusion around closing costs by sharing what they are, how much you’ll pay, how you can reduce them, and more.
Closing costs refer to the fees and expenses you’ll pay when you purchase a house. These are separate from the down payment, and you’ll need to budget for both.
Some closing costs are fees are charged by your lender, while others go to the title company, the appraiser, or other parties. These costs serve a variety of purposes, including your mortgage origination, title insurance, attorney fees, and more.
Although the closing costs get distributed to several different parties, you will pay them as a lump sum. The settlement agency managing the closing will disburse the funds as needed.
In most cases, it’s the buyer who pays the closing costs. However, as we’ll discuss further below, there may be some situations when a seller may agree to pay some or all closing costs.
The closing costs you’ll pay depend on the lender you’re working with, where you’re buying the home, the type of loan program you’re using, and several other factors.
But here are some common closing costs you may encounter.
Related reading: VA Loan Closing Costs: How Much Do You Really Need to Close?
The amount you’ll pay for closing depends on a few different factors, including where you live, the lender you work with, the size of your down payment, and more. In general, they range from 2% to 5% of the loan amount.
Let's look at an example, but keep in mind closing costs vary for each loan scenario and lender.
Say you were purchasing a home for $300,000. Let’s assume you’ve put 20% down making your loan amount $240,000 and your state doesn’t require some of the fees listed above. In that case, you might pay on the lower end of the closing cost range. If your closing costs are 2% of the loan amount, they’ll equal $4,800.
On the other hand, let’s say you had a 10% down payment. Then your loan amount would be $270,000 and you would have to pay for mortgage insurance. Additionally, perhaps your state has more closing requirements or you chose to purchase discount points. In that case, your closing costs might be on the higher end at 5%, meaning you would pay $13,500 out of pocket.
Related reading: FHA Loan Closing Costs: What You’ll Pay and How To Save
Remember that in both of these cases, the closing costs don’t include your actual down payment. That’s an amount you’ll have to budget and pay for separately.
Generally speaking, closing costs tend to be on the lower end of the spectrum the more expensive the home is. And they tend to be on the higher end for lower-priced homes.
That doesn’t mean you should look for a more expensive house, just to reduce your closing costs, as you’ll pay more for the costlier house over time. But it’s worth saving for the upper end of closing costs to make sure you aren’t short on funds when it comes time to close.
Your lender can give you a closing cost estimate when you apply to buy a home.
As is the case with many expenses, closing costs tend to affect certain populations more than others. According to a 2021 Fannie Mae report, closing costs are regressive, meaning low-income individuals pay a higher percentage.
In this case, the report found that the median closing costs as a percentage of the home purchase price were 13% higher for low-income first-time homebuyers than for other first-time homebuyers.
In addition to being more expensive for low-income homebuyers, closing costs are particularly impactful for Black and Hispanic first-time homebuyers. The Fannie Mae study found that 21% of Black and 19% of Hispanic homebuyers paid as much or more in closing costs as they did for their down payment. The percentage is much lower for white and Asian homebuyers.
Unfortunately, these discrepancies have created just one more barrier to entry to homeownership on top of the others that have made it more difficult for low-income individuals and people of color.
Closing costs can add thousands of dollars to the cost of buying a house. Luckily, there are a few steps you can take to reduce the closing costs on your home purchase.
Not all lenders are created equal, and that applies to closing costs as well as other factors. Rather than getting your home loan with the first lender you find, shop around with a few different lenders. When you apply for the loan, each lender will provide you with a Loan Estimate, which will include an estimate of your closing costs in what’s called a Closing Disclosure. Be sure to ask questions about any fees that seem unclear.
In some cases, you may be able to negotiate with your lender to reduce your closing cost fees. When you receive your Loan Estimate, take a look at the lender fees. There are some standard fees you’ll pay, including an origination or underwriting fee. But if there are many fees or they seem to overlap, that could be a good opportunity to negotiate with your lender or ask whether they can offer you a credit to reduce your upfront costs.
Not all fees are negotiable. While the lender fees may have some wiggle room, those to the title company and other third parties likely can’t be negotiated.
On your Closing Disclosure, you’ll notice a section titled “Services You Can Shop For.” This section may include a survey fee, title insurance, title search, pest inspection fee, and more. While your Loan Estimate will include a rough cost for those services, you can shop around to see if you can get a better deal elsewhere.
Depending on the housing market, you may be able to ask the seller to pay for a portion of your closing costs. Unfortunately, this isn’t always possible. When there’s a seller’s market as we’ve had throughout 2020, 2021, and 2022, home sellers can be pickier when it comes to which offers to accept. And chances are they won’t agree to pay for closing costs when they don’t have to.
You may be able to reduce your closing costs by increasing your down payment. For conventional loans and FHA loans, a larger down payment can reduce the amount you’ll pay in mortgage insurance. And for a VA loan, a larger down payment can reduce your VA funding fee. Finally, a larger down payment could result in a lower interest rate, since it reduces the risk to the lender. As a result, you’ll owe less interest upfront, as well as have smaller monthly payments.
Of course, a larger down payment will still require more money upfront, even if it’s not going toward closing costs. But in addition to the other benefits we listed, a larger down payment will increase your equity in the home, while additional fees won’t.
Some lenders give you the option of wrapping some of your closing costs up into the loan amount so you can pay them off over time. Keep in mind that doing so will result in a larger loan amount and higher monthly payments. But if your closing costs are a barrier to entry to buying a home, then it may be worth the added long-term cost.
Closing costs are one of your largest upfront expenses when buying a home. And unfortunately, many people either don’t think to budget for them ahead of time or simply don’t know how much to budget for. Going into the homebuying process fully prepared will help reduce stress and overwhelm, as well as ensure you’ve properly budgeted for everything you need.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
