When it comes time to purchase a house, most likely the biggest expense you will consider is the down payment. While your down payment will be a huge expense, there are other costs that must be considered when purchasing a home. Closing costs, which include the fees and taxes that must be paid to finalize the purchase, can quickly add up.
We thought it might be a good idea to take a look at what type of expenses you may have to cover at closing as well as how much you can expect to pay.
What expenses are included with closing costs?
Here are a few of the most common closing costs that you can expect to see when purchasing a home:
- Lender fees: This consists of the costs your lender will charge to create your mortgage. These fees typically include things such as a credit report fee which covers the cost of pulling your credit to make sure you qualify for the loan. In addition, lenders typically charge an application fee, underwriting fee as well as an origination fee.
If you are purchasing discount points to lower your mortgage rate, those costs will be included in your closing costs.
- Title fees: These fees consist of a title search fee and title insurance. The title search fee covers the cost of hiring a title search company to search property records for problems with the house title, such as a tax lien on the property. Title insurance is necessary to help cover any costs to resolve title issues that come up after the sale has been completed.
- Appraisal fee: This fee is pretty self-explanatory, it covers the cost of a professional appraiser to set the value of the home you are purchasing.
- Home inspection: This fee covers the cost of a professional home inspector to evaluate the condition of the property. While it is possible to waive the inspection and its fees, this is never a good idea. Having your potential home inspected before closing is a great way to avoid expensive repair issues that may crop up after closing.
- Mortgage insurance: If you have a down payment of less than 20 percent or a government backed loan, your lender may require that you carry mortgage insurance which is often rolled into the closing costs of the loan.
- Prepaid expenses: This category covers expenses that accrue between the closing date of the sale and when your first monthly mortgage payment is due. Typical prepaid expenses include homeowners insurance, mortgage interest and property taxes.
How expensive are closing costs?
Data from ClosingCorp shows that in 2021, the national average for closing costs on a single-family property was $6,905. However, closing costs can vary dramatically depending on the state you are buying in as well as the cost of the home. As an example, according to ClosingCorp data, the average closing costs in Mississippi came in at a mere $2,061 while homebuyers in Washington D.C. paid a whopping $29,888 in closing costs on average. In general, budget between 3% and 6% of the loan amount to cover closing costs.
Can closing costs be paid with a credit card?
In almost all cases, mortgage lenders will not accept a credit card payment for closing costs. You will need to pay your closing costs with a cashier’s check or wire the money.
Is it possible for closing costs waived?
In most cases, it is not possible to get closing costs waived but you may be able to negotiate a reduction in fees or roll them into your mortgage loan. Your lender may be able to help reduce some of the closing costs or offer credits toward closing costs.
Tips to reduce closing costs
While it is usually not possible to get closing costs waived, there may be ways to reduce your closing costs or get some assistance. Here are a few tips to reduce your closing costs:
Local assistance: It is possible that there are local assistance programs. Grants or local loans that are forgivable may help you cover some of the upfront costs of purchasing a home.
Negotiate with the seller: If you are in a seller’s market, this tactic probably won’t work but if the property has been on the market for while or it’s a buyer’s market, it is possible that the seller may help cover some of the closing costs to ensure the deal closes.
Smaller down payment: If you can get a mortgage that requires a smaller down payment such as an FHA or other government backed loan, you can put the money saved towards closing costs. Remember, a smaller down payment does mean your loan will have a higher principal so you will end up paying more over the life of the loan.
Roll the closing costs into mortgage: A no closing -cost mortgage rolls the closing costs into the loan amount. This means that while you won’t have to cover closing costs when you close on the house, your loan amount will be more expensive over the life of the loan.