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What Are Closing Costs on a Mortgage?

Closing costs can add a substantial amount to the total cost of purchasing a new home. Here’s an overview of what to expect with mortgage closing costs.

November 29, 2021

If you’re getting ready to buy a home, chances are you’ve been focusing on saving up for a down payment. But a down payment isn’t the only chunk of money you’ll need to have ready when you close on your new home. 

Closing costs are an overlooked and often misunderstood aspect of buying a new home. To be an informed homebuyer, it’s helpful to do your homework first. 

This article will discuss the basics of these costs, explain what is and what isn’t included in closing costs, and describe some of the most common closing cost fees. 

What are closing costs?

Closing costs are fees and other expenses that must be paid when you close on a house. Most of these costs are fees that are paid to the issuing lender, but there may also be attorney fees, prepaid property taxes, prepaid homeowners insurance and other costs.

Closing costs don’t include the down payment: The down payment goes toward your equity stake in the property and is not considered a closing cost. 

What is included in closing costs?

The most common closing costs include:

Loan origination fees: This includes fees from the mortgage provider and covers mortgage processing and underwriting fees. This fee is typically around 1% of the value of the loan amount.

Homeowners insurance: In many cases, you will need to prepay for the first 12 months of homeowners insurance, which can cost $1,000 to $2,000 for a typical home — or much more for expensive homes. 

Property taxes: Most of the time you will need to prepay for 6 to 12 months of property taxes at the time of closing. Property taxes vary greatly; look up tax rates in your area for details, or check sites like Zillow or Redfin for estimated taxes on the property you’ll be buying. 

Closing fee: This fee varies substantially and typically goes to the escrow company or the attorney that coordinates the closing process for you. 

Application fees: Some mortgage providers charge a flat fee of up to $500 to process your loan application. 

Private mortgage insurance (PMI): If you put less than 20% down, you will need to pay for private mortgage insurance. You may need to prepay at closing. 

Appraisal fees: Many lenders will hire a third-party appraiser to come out and assess the value of the home to ensure that the mortgage isn’t more than the actual value of the home. This can cost between $300 and $600, and sometimes more.

Title insurance: Title insurance is optional, but it can add fees of an additional 0.5% to 1% of the cost of the mortgage to closing costs.

Attorney fees: Some states require that you have an attorney in order to close on a mortgage. This cost can vary depending on the location and services provided. 

Discount points: Discount points are an optional way to lower your interest rate by paying more upfront. This is completely optional, but it can add several thousand dollars to your closing costs if you opt for it. 

Miscellaneous fees: Other small fees may be added to closing costs, including: credit check fees, courier fees, flood certification fees, lead-based paint inspections, pest inspection fees, recording fees and more. 

There are other potential closing costs as well. Check with your mortgage provider or real estate agent for details. Your agent can help explain how to calculate closing costs in your area, or you can use an online calculator for a rough estimate. 

How much are closing costs?

Costs vary by location and the value of the property. That said, a good rule of thumb is that mortgage closing costs are typically 3% to 6% of the cost of the home. 

For example, if you’re purchasing a $400,000 house, you can expect closing costs to be $12,000 to $24,000. 

But in a low-cost-of-living area and in areas that don’t require prepayment of property taxes, closing costs can be quite a bit lower — as little as $2,000 on a lower-cost home. 

Also keep in mind that buyers and sellers may split closing costs in some cases. We’ll discuss this more below.

Average closing costs

The average closing costs vary hugely depending on location and the price of the home. 

  • The nationwide average in 2020 was $6,087, including taxes, and $3,470, excluding taxes

  • On the high end, buyers in Washington, D.C., paid an average of $29,329.89 

  • On the low end, buyers in Missouri paid just $1,571 on average 

Property taxes are the biggest factor in determining how much your closing costs will be. In some areas, you are required to prepay 6 to 12 months of property taxes in advance, while in other jurisdictions no prepayment is necessary. Property tax rates also vary significantly, further widening the gap between different locations. 

Who pays closing costs?

Both buyers and sellers pay closing costs. 

By default, the buyer will be responsible for most of the closing fees. However, buyers are free to negotiate with sellers to help with closing costs. 

This is called seller concessions, and it essentially means that you can get the seller to agree to cover certain costs, or a percentage of all costs.

Seller concessions must be negotiated during the offer process, before closing. In a hot real estate market like we have today, it may be more difficult to negotiate on closing costs, but it’s certainly still worth trying.

Preparing for closing costs

Closing costs can add substantially to the cost of buying a home. But if you’re prepared, you shouldn’t have to worry about these necessary expenses. 

In general, closing costs can be paid in one of two ways:

  • Upfront, at the time of closing

  • Rolling closing costs into the mortgage

For first-time homebuyers, rolling closing costs into a mortgage is often not possible — but it’s a good idea to check with your mortgage provider to be sure. 

This means that in many cases you’ll need to save up to cover mortgage closing costs at the time of closing or negotiate with the seller to cover some of the costs. You may also be able to negotiate certain costs with your lender. 

Reducing debt before closing on a home

One of the best things you can do to prepare for a new home purchase is to lower your existing debt load. By paying off debt, you can improve your debt-to-income ratio, which may help you qualify for a lower interest rate. 

Paying off credit cards and other high-interest debt is the first place to start. Tally is a powerful tool that helps Americans save money on credit card interest and pay off debt faster. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.