What Are Closing Costs and How Much Should You Expect to Pay?

What Are Closing Costs and How Much Should You Expect to Pay?

Mortgage
September 17, 2024•2 min read

What Are Closing Costs?

Closing costs are the fees associated with obtaining a mortgage and transferring ownership of the property. They generally fall into two categories: hard costs and prepaids.

Hard Costs

Hard costs include lender fees, third-party fees, and title fees:

  • Lender Fees: This includes an origination fee (typically 0-1% of the loan amount), underwriting fees, and processing fees. These charges cover the administrative work required to process your loan.

  • Third-Party Fees: These are fees paid to outside parties that assist in the mortgage process. The most common third-party fees include the cost of an appraisal (to assess the value of the property) and a credit report (to check your creditworthiness).

  • Title Fees: These fees ensure that the title is transferred to you without legal issues. They include closing fees for the title company and title insurance, which protects you and the lender from potential claims against the property.

Prepaids

Prepaids are charges that cover items in advance but are included in your closing costs. These include:

  • Homeowner’s Insurance: Most lenders require the first year of homeowner’s insurance to be paid upfront.

  • Escrow Account: This account is set up to hold funds for property taxes and insurance. You’ll need to prepay 2-4 months of taxes and insurance on purchases, and it could be 2-14 months on refinances.

  • Daily Interest Charges: You’ll also pay daily interest from the day you close until the end of the month. This is calculated by multiplying the daily interest rate by the number of days remaining in the month.

How Much Should You Expect to Pay?

In general, closing costs range between 2% to 5% of the loan amount. This can vary depending on the lender, the loan type, and the location of the property. For example, on a $300,000 mortgage, you can expect to pay anywhere between $6,000 to $15,000 in closing costs.

Ways to Manage Closing Costs

Some lenders may offer to cover your closing costs in exchange for a higher interest rate. This could reduce your upfront expenses but may increase your monthly mortgage payment over time. Another option is to negotiate with the seller to cover part or all of your closing costs, particularly in a buyer's market.

Conclusion

Understanding the breakdown of closing costs will help you budget more effectively and reduce stress during the homebuying or refinancing process. By planning ahead and discussing your options with your lender, you can better navigate the financial aspects of closing on your new home.

For more information on closing costs, check out the following resources:

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