Closing Costs Explained for Homebuyers

Most first-time buyers walk into the mortgage process knowing that they’ll be making a down payment on their home purchase. But if you’re buying or refinancing a house, you need to be prepared to pay closing costs as well. For many, especially a first-time home buyer, understanding cash to close and how much are the closing costs can make budgeting easier.

Closing costs are the various fees associated with closing on a real estate transaction, such as title policies, inspection fees, mortgage origination fees (often called lender fees), prepaid insurance and taxes, recording fees, and more. Think of this as closing costs explained in a single snapshot: they include lender fees, third-party charges, and government-related recording fees that must be paid as part of your cash to close.

When will you find out how much you’ll need to pay in closing costs?

When you’re applying for a loan, a lender is required to send you a Loan Estimate within three days of receiving your full application. This estimate will let you know what you can expect to pay in closing costs, and will also provide you with other important information, including your loan terms, estimated interest rate, and monthly payment. Of course, this is just an estimate and is subject to change.

You’ll receive another document three days prior to your closing date, known as the Closing Disclosure. The Closing Disclosure outlines your final loan terms and provides a more accurate breakdown of your mortgage closing costs. Reviewing this document is a great time to ask how much are closing costs, confirm lender fees, and verify any recording fees so you know your true cash to close.

How much will you pay in closing costs?

As a general rule of thumb, closing costs are typically 3% to 6% of the home’s purchase price. The total dollar amount paid in closing costs can vary vastly, depending on property location and the value of the home you are purchasing. Many borrowers use a closing costs calculator to estimate their cash to close before making an offer, and a closing costs first-time home buyer may find such a tool especially helpful in planning.

So, in theory, if you’re buying a $200,000 house, your closing costs could vary between $6,000 and $12,000. A closing costs calculator can help refine this range by factoring in local taxes, recording fees, lender fees, and prepaid items to give you closing costs explained in detail.

One-time Closing Costs and Fees: 

Origination fees and points (lender fees), appraisal fee, credit report fee, flood certification, title search, and lender’s title insurance, attorney and closing/settlement fees, recording fees, etc. These items are often referred to as mortgage closing costs because they are tied to the loan process itself.

Escrow and Pre-paid Expenses: 

Taxes and other government fees, pre-paid homeowner’s insurance, up-front mortgage insurance premiums, pre-paid interest, escrow payments, etc. These contribute to your overall cash to close and are part of your mortgage closing costs even though they may be paid to third parties.

Some lenders and loan scenarios allow you to roll your closing costs into your mortgage rather than paying them upfront; however, you will have to pay interest on them throughout the life of the loan. Before choosing this option, use a closing costs calculator to see long-term impacts and ask to have closing costs explained line by line, including lender fees and recording fees.

In some instances, the sellers can pay a portion of the buyer’s closing costs if an agreement is made in negotiations. Each loan program has unique rules and guidelines for how much a seller can contribute toward the borrower’s closing costs. If you’re wondering who pays closing costs buyer or seller, the answer can vary by market norms and contract terms—sometimes the buyer pays most mortgage closing costs, sometimes the seller contributes, and sometimes costs are split. Be sure to clarify who pays closing costs buyer or seller with your agent and lender before finalizing your offer.

If you don’t have a lot of cash on hand to put toward your closing costs, there are certain grants available that can help. Speak with your loan officer to see if you qualify for down payment or closing cost assistance grants, which do not need to be repaid. These can be particularly beneficial for a closing costs first-time home buyer who needs help covering cash to close while still managing other expenses.

The information contained herein (including but not limited to any description of TowneBank Mortgage, its affiliates and its lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. This is not a commitment to lend.
 

Don’t let closing costs catch you off guard.  Our team is here to help walk you through every fee, estimate your cash to close, and make sure there are no surprises along the way.

Talk to a Loan Officer Today.