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The home buying process can be complicated for homebuyers and real estate investors alike.
While you can rely on an agent or lawyer to walk you through the process — and is something we recommend — it is important to understand specific items of the process so that you can ensure you aren't paying more than you need to.
One of those items? Closing costs.
Closing costs are an essential expense to take into account when you are:
- buying a house
- selling
- refinancing
Plus, you can reduce your closing costs — if you know how.
In this article, we’ll discuss just that, as well as explain how much the average closing costs are, examples of closing costs, and more.
What are Closing Costs?
Closing costs cover the processing fees you will need to pay to your mortgage lender and the other actors involved in the closing process.
The average closing costs include expenses related to the underwriting and origination of the loan (if you are financing the property), but also:
- filing fees
- property taxes
- Insurance
- and more
The list varies depending on the type of financing, the property being transferred, and the local requirements.
What Are The Average Closing Costs?
Unfortunately, there is no straightforward answer, because closing costs represent a percentage of the purchase price of the property.
Again, they vary depending on:
- your state’s requirements
- the type of financing you will use to buy the house
- And more
That being said, the average closing cost is generally equivalent to 2% to 6% of the contract price.
Who Pays Closing Costs?
The homebuyer is typically responsible for paying most of the closing costs since most of the fees are related to financing.
However, the home seller also needs to budget for some of the costs associated with the real estate agent commission, prorated property taxes, and other fees.
The property buyer may request that the sellers pay part of their closing costs as part of the contingencies, too.
Examples of Closing Costs
The closing costs include many different fees.
As mentioned earlier, the exact list varies depending on the property, the type of financing involved, and so on.
Here is a list of some of the most common closing costs you may encounter.
Application Fees
The application fees are part of the mortgage process.
They vary depending on the lender (up to $500) and must be paid regardless of whether you are approved or rejected
Appraisal
The mortgage lender will request an appraisal to ensure the property you intend to purchase is worth the purchase price.
Depending on your location and the size of the property, an appraisal typically costs between $300 and $500.
The mortgage officer will normally only approve a loan up to the appraised value of the property.
If the contract price is higher, you may choose to back off (appraisal contingency) or put in extra cash to bridge the difference.
Title Search Fees
The title company will need to search for liens, bankruptcies or unpaid back taxes that could affect property ownership and prevent the title transfer.
Depending on your location, the search will be conducted by a title search company or a real estate attorney.
This closing cost will cost between $200 and $400.
Underwriting Fees
Underwriting fees are a one-time payment collected by loan underwriters as compensation for evaluating and verifying the mortgage application.
Loan Origination Fees
The loan origination fee may be charged in addition to or instead of the underwriting fee.
It covers the administrative cost of processing the loan and processing the associated paperwork.
It typically represents 1% of the loan value.
Credit Reporting Fees
Your credit score is a critical component determining whether you will be approved for a mortgage, the interest rate you can qualify for, etc.
Your mortgage originator will likely need to pull your credit report several times throughout the home buying process.
...And Many More
These closing costs are only a couple of examples of fees you may encounter while buying or selling a house.
Other typical closing costs include:
- attorney fees
- flood certification fees
- recording fees
- transfer taxes
- title insurance
- HOA fees
Three Ways to Reducing Closing Costs
Closing costs are a necessary expense when buying or refinancing a house.
However, there are ways to lower or even delay the payment of these fees.
Here are a few options.
Option #1: Shop Around
You may find a better deal on several of these fees by comparing different providers and mortgage companies.
You may even be able to negotiate some of these fees down with your lender and lower your closing costs.
Because of this, we recommend shopping around so that you can find the best deal possible.
Option #2: Get a No-Closing Costs Mortgage.
If you would rather avoid paying closing costs upfront (buying a house is expensive enough as it is, after all), your lender may be willing to include them as part of your mortgage total.
However, beware that your interest rate may also be higher and that your average closing costs will increase in the long run.
If you are interested in this strategy, examine how it will affect you in the long term, not just the short term.
Option #3: Ask the seller to contribute to closing fees.
Keep in mind that if you are buying a property from a motivated seller, he or she may be willing to sweeten the deal by agreeing to pay part of your closing costs to get the deal done.
Closing Cost Calculator
If you’re curious about how much closing costs you can expect to pay, there are several calculators that can give you an estimate. Here are a few.
The Bottom Line: Closing Costs
Closing costs are a necessary expense you will need to budget in when buying, selling, or refinancing a property.
Being prepared to ask questions about closing costs — for example, creative ways to lower them — can help you avoid overpaying when buying a property.
