Closing Costs Breakdown: What to Expect in Your Home Purchase

Buying a home is a big life milestone, but it comes with a bunch of costs that can really confuse buyers. Closing costs, for example, often catch first-time buyers off guard because they add so much to the final price. That’s why getting a handle on these expenses is super important before you sign on the dotted line.

Contents

What Are Closing Costs?

Factors Influencing Closing Costs

Responsibility for Closing Costs

Typical Components of Closing Costs

How to Find Your Actual Closing Costs

How to Get Closing Costs Waived

What Are Closing Costs?

Closing costs include one-time fees and expenses paid at the end of a real estate transaction. They impact home buyers and sellers. These costs vary based on location, loan type, and purchase price, but most experts estimate them at 2 to 5% of the purchase price.

Understanding each component is crucial for home buyers. With median home prices at $420,400 in Q3 2024, 5% for closing costs translates to $21,020. That’s serious money for the first-time home buyer or someone who needs maximum value from their sales price.

An online closing cost calculator can estimate the burden based on the purchase price and home location. It’s a place to start, but it only sometimes factors in extra closing costs like prepaid expenses for inspections.

Factors Influencing Closing Costs

Location

Closing costs can vary significantly due to differing state and local regulations, taxes, and fees. For example, real estate transfer taxes and recording fees may differ, reflecting local government requirements. These regulations may also require a land survey or special reports, like lead-based paint inspections. The lender may require additional reports like pest inspections, depending on the property address.

Additionally, some areas might have higher attorney fees or require specialized inspections. In 2024, average closing costs were anywhere from $2,061 to $29,888. Research location-specific fees and consult with local real estate professionals.

Loan type

The type of loan greatly affects buyer closing costs. Lender fees to watch out for are application, origination, and underwriting fees.  These can run 1-2% of the total loan amount.

Loan origination fees, private mortgage insurance premiums, and credit report fees change based on the loan type. Conventional loans might have different requirements and lender fees than FHA or VA loans.

Some first-time homebuyers use loan options that roll mortgage closing costs into the loan, reducing out-of-pocket expenses. Other loan terms restrict the amount of closing fees that can be wrapped into the loan or paid by a seller. Some government loans, like FHA or VA loans, charge additional fees–a mortgage insurance premium or VA funding fee, respectively.

Carefully review loan estimates provided by a mortgage lender to understand all variances contributing to its closing cost.

Purchase Price

The purchase price directly impacts several closing cost components, such as loan origination fees, which are often a percentage of the loan amount. That’s why there’s a correlation between higher-priced homes having higher closing fees. The processing fees associated with the loan transfer taxes scale up with the purchase price. A closing costs calculator can estimate these expenses based on a property’s purchase price.

Responsibility for Closing Costs

Buyers and sellers typically split the closing fees, but not always equally in terms of money owed.

The costs for buyer usually revolve around mortgage-related closing costs, such as the loan origination fee, mortgage insurance premiums, and appraisal fees. The administrative costs cover loan applications, credit score reports, title insurance, and appraisal fees. Homeowner’s insurance premiums and home inspection fees are upfront costs paid before closing day.

Sellers tend to be responsible for fees associated with the transfer of ownership, like the transfer taxes, title insurance policy, and recording fees. They may contribute to property taxes, which are often pro-rated based on the time they owned the home. Sellers usually shoulder paying the real estate agent commission out of the sale proceeds.

The actual burden of potential closing costs can be negotiated as part of the real estate contract. Buyers may request the seller to cover some of their costs as part of the deal, particularly if the market favors buyers. This may involve the seller paying a share of the buyer’s closing costs, known as seller concessions, in exchange for a higher sale price or other favorable terms.

Both parties should review closing costs carefully using a cost calculator, loan estimates, or closing disclosure form to understand the overall financial obligations. Together, reach a mutually beneficial agreement while considering the type of loan and any unique lender requirements.

Typical Components of Closing Costs

On their own, the escrow company, title search fee, and inspection fees don’t seem like a lot.  But start adding them all up, and next thing you know, there’s a hefty bill awaiting on closing day. How much exactly are you looking at? Here are estimated common closing costs based on 2024 nationwide estimates.

Component	Estimated Cost
Loan Origination Fee	0.5% – 1% of the loan amount
Appraisal Fee	$300 – $500 (average $350)
Home Inspection	$300 – $500 (average $343)
Credit Report Fee	$65 – $100
Title Insurance	0.5-1% of purchase price
Transfer Taxes	Varies by location, often 0.1% – 2% of purchase price
Recording Fees	$50 – $250
Attorney Fees	$500 – $1,500, varies by location
Homeowners Insurance Premium (First Year)	$300 – $1,000
Private Mortgage Insurance (PMI)	0.3% – 1.5% of annual loan amount
Escrow Funds for Taxes and Insurance	2 – 6 months’ worth of premiums
Survey Fee	$400 – $700 ($565 average)
Title Search	$75-200
Escrow Agent Fee	1-2% purchase price
Homeowners Association Fees:	$170 (nationwide average)
Mortgage Discount Points:	1% of total mortgage

This table provides a streamlined overview of the common individual closing costs. Your loan estimate and closing disclosure will also provide cost estimates that are more accurate for your area and the purchased home. Shop around to find the lowest closing costs in your area. Note that actual amounts can vary based on region-specific requirements and individual lender policies.

About Transfer Taxes

Transfer tax costs range wildly. Some states have no transfer tax at all. Consider yourself fortunate if you’re a home buyer in any of these states:

Alaska	Idaho	Indiana
Kansas	Louisiana	Mississippi
Missouri	Montana	New Mexico
North Dakota	Oregon (most counties)	Texas
Utah	Wyoming

Meanwhile, of the states that do levy a real estate transfer fee, Kentucky, Ohio, Georgia, Alabama, and some parts of Hawaii are as low as 0.1% of the purchase price. Delaware levies a 4% tax. Some states, like Vermont, New York, and New Jersey used a tiered system based on purchase price.

These figures are for the state level. Local counties or cities may have a transfer tax.

Other terms for this tax include deed transfer tax, real estate conveyance tax, or documentary stamp tax. The idea is the same: there is a fee to record the change in property ownership in the public record.

About Escrow Fees

“Escrow fees” is a catch-all term for all the costs associated with the closing process. These typically include:

• Notary fees: charged for notarizing documents to confirm their authenticity and legality.
• Title insurance fees: depending on the state and title insurance requirements
• Attorney fees: covering the legal assistance provided for reviewing and preparing closing documents.
• Recording costs: the legal fees for filing the deeds and mortgage lien with the local county government

Additionally, escrow fees might include charges for the escrow agent’s services. They manage the escrow account and ensure all transaction conditions are met before funds are disbursed. Each charge pays their time and knowledge to facilitate a smooth and legally compliant closing process.

If you have questions about what is or isn’t covered in the escrow fee, ask your real estate agent, escrow agent, or real estate attorney.

How to Find Your Actual Closing Costs

Be on the lookout for two documents, one early in your home loan process and one before closing day.

Closing Estimate 

The Closing Estimate, or the Loan Estimate, is a three-page document lenders provide within three business days after receiving a mortgage application. It breaks down the estimated interest rate, monthly payment, and total closing costs for the loan. This document lets potential home buyers understand all estimated closing costs upfront and how much cash they’ll need at closing.

Closing Disclosure

Meanwhile, the Closing Disclosure is a five-page form provided to the buyer and seller at least three business days before closing. For the buyer, it contains the final details about the mortgage loan, including the loan terms, projected monthly payments, and specific closing costs.

The Closing Disclosure allows buyers to confirm their loan terms haven’t changed since they received the Closing Estimate. Buyers should meticulously review this document, comparing it with the Loan Estimate to ensure there have been no unexpected changes in terms, fees, or closing costs. This transparency ensures both buyers and lenders agree on the final financial details of the purchase.

For the seller, it will show what they owe in transfer fees, property tax, seller concessions, and real estate commissions. Review to verify the price in closing costs is as expected from negotiations and local recording fees.

How to Get Closing Costs Waived

Fortunately, there are strategies to reduce or totally eliminate these expenses. Learn about each method to see if you can leverage these techniques and save some money.

Shopping Around

Some closing costs are locked in, like the governmental transfer taxes, but others you can shop around for to find the best deal. These include home inspections, owner’s title insurance, and attorney fees. In addition, not all mortgages require loan application fees or underwriting fees. That’s something to check when comparing different mortgages.

Ask to Waive the Origination Fee

Some lenders may reduce or waive origination charges or underwriting fees, particularly for well-qualified buyers or those refinancing an existing loan held by that lender. The incentive increases if you can show a similar loan with lower fees from a different mortgage broker.

Negotiating origination fees with loan officers benefits homebuyers looking to lower their upfront expenses. Buyers should inquire about any potential promotions or discounts that might help reduce these fees while shopping around. Always remember to crunch all the numbers, including the mortgage rate and loan terms, while negotiating to ensure the overall offer remains favorable. If they waive the origination fee, but bump the interest rate, is that still the better deal?

Don’t let what appears to be a discount turn into a higher expense. Align the whole loan package with your long-term financial goals by carefully examining all aspects of the mortgage.

Lender Credits

Lender credits are a viable option for reducing upfront closing costs. In exchange for accepting a higher interest rate on your loan, your mortgage lender provides credits to offset closing costs. This strategy benefits buyers who plan to sell or refinance in the near future. The savings on closing costs might outweigh the increased monthly payment.

Seller Concessions

Seller concessions involve the seller agreeing to pay a portion of the buyer’s closing costs. Market conditions and negotiation skills can influence the extent of these concessions. In competitive real estate markets, getting the seller to agree to pay more on top of the commission fee and transfer taxes may be more challenging. However, sellers may be more willing to offer concessions to expedite the sale in a buyer’s market.

Regulations around seller concessions on closing costs vary by state. The seller may provide a lump sum credit, cover a specific expense, or provide a percentage. Additionally, the buyer’s loan terms may put limits on seller concessions.

Rolling Costs into the Mortgage

Another strategy is to roll closing costs into the mortgage. This means you finance these costs by adding them to the loan amount. While this increases the total loan balance and, subsequently, the monthly payment, it allows you to avoid paying large sums in cash at closing. This option is more common with conventional loans and depends on the mortgage lender’s policies. Use a cost calculator to understand the impact on your mortgage. You may need to adjust your home buying budget downward to compensate for the higher lending cost and monthly mortgage payment.

Closing Cost Assistance

First-time home buyers or low-income earners may be eligible for special grants and payment assistance programs for down payments or closing costs. Actual qualifying requirements depend on the program. Check with the Housing Finance Authority (HFA) or local county government for lists of possible resources. Some nonprofits and private lenders run closing cost and aid programs for their local communities. The upside is grants do not have to be repaid.

Cut Your Closing Costs

To wrap it up, figuring out how to manage expenses at the closing table does make a difference in your home-buying journey.  Strategies like seller concessions or rolling costs into your mortgage let you tailor how you handle these expenses with your budget. After all, informed decisions make buying a home less stressful.

Ready to take the next step? Find a real estate agent who can explain how to plan for buying a home and help you through house hunting and closing.