Mortgage loans come with closing costs. This is a reality of the lending industry. These costs include such things as document preparation fees, loan origination fees, appraisal fees, title and escrow fees, attorney fees, as well as any discount points you choose to pay at closing.
In this article, we will address two of the most common questions on this subject:
- How much are closing costs for home buyers?
- When will I know exactly how much I have to pay at closing?
How Much Are Closing Costs for Home Buyers, on Average?
According to the real estate information website Zillow, closing costs can average between 2% and 5% of the purchase price. (It partly depends on where you live, since local tax rates play a role in the final number.)
For an average-sized home loan, 2% to 5% could add up to several thousand dollars. Here’s an example. Let’s take the middle of this range (3.5%) and apply it to a mortgage loan of $300,000. The math looks like this: (300,000 x .035 = 10,500). That’s how much the closing costs might be for a loan of that size.
Here’s how the numbers would work at the lower and upper ends of the range:
- 2% of $300,000 = $6,000 (multiply loan amount by .02)
- 5% of $300,000 =$15,000 (multiply loan amount by .05)
According to a 2013 survey conducted by Bankrate.com, the most expensive states for closing costs are Hawaii, Alaska, South Carolina, California and New Mexico. The least expensive states are Wisconsin, Missouri, Kansas, Michigan and Washington.
The regional differences are largely a result of different tax rates. But these fees can also vary widely from one lender to the next. This is a result of the origination fee. Lenders charge origination fees to cover the costs of generating a loan, and also to make a profit. This is one of the fees that make up your closing costs. But they can vary from lender to lender.
According to a January 2013 New York Times article: “The origination fee and the mortgage credit vary because they are one of the ways the lender makes money from the loan.”
Some companies charge lower fees to generate more volume (by undercutting the competition). Other companies charge more for mortgage origination, in order to make more money on each loan they create. It’s one of several reasons you should shop around.
A List of Common Fees, Taxes and Charges
Here are some of the items you might see in your list of closing costs:
- Home appraisal fee
- Credit report fee
- Closing / escrow company’s fee
- Title search fee
- Property survey fee
- Courier fee
- Homeowners insurance (typically the first year is paid at closing)
- Recording fees
- Transfer taxes (charged when the title transfers from seller to buyer)
- Lender’s attorney fees
- Mortgage processing fee
- Mortgage underwriting fee
- Discount points (prepaid interest used to secure a lower mortgage rate)
Given the potential size of mortgage closing costs, it’s important to find out how much they are going to be. So let’s talk about how you can do that.
When Will I Know How Much I Have to Pay at Closing?
Mortgage lenders must tell you how much your closing costs could be shortly after you apply for a loan. According to the Truth in Lending Act, lenders must give you a Good Faith Estimate (GFE) within three days of receiving your mortgage application. As the name implies, this three-page document gives you an estimate of the total closing costs you will encounter when you close on the loan.
You can view a sample Good Faith Estimate (PDF file) on the HUD website.
Page 1 of the GFE includes an estimate of the total settlement charges, or closing costs, that may be applied to your loan. Here’s a snapshot of what that section looks like:
The second page of the GFE shows how the lender arrived at their estimate. It provides a line-item breakdown of the different closing costs associated with your mortgage loan. Here’s what that section looks like:
Just remember it’s called a Good Faith Estimate form, with “estimate” being the key word. It is not called an “Exact Closing Cost” form because it’s not exact. It’s common for the actual amount paid at closing to vary slightly from the amount estimated on the GFE.
In the past, the GFE document was something of a joke. The actual costs paid by the buyer / borrower would often end up being much higher. But new laws limit the amount by which these costs can rise from estimate to closing. So the GFE document is more useful today than it was in the past.
Shortly before closing day, you’ll also receive something known as a HUD-1 Settlement Statement. Unlike the GFE, the HUD-1 document shows you the actual costs that must be paid during settlement.
So this answers the question: “How do I know how much my closing costs will be?” You can find out through a two-step process:
- You will get an estimate on the front end, shortly after you apply for the loan.
- You will get an actual or finalized tally on the back end, just before you close on the loan.
Where to Learn More
Despite the length of this tutorial, we have only scratched the surface of mortgage closing costs. The important thing to realize is that these fees and charges can easily add up to thousands of dollars. So you want to ask about them up front.
We strongly encourage you to continue your research beyond our website. You can start by reading the “Settlement Costs Booklet” created by the Department of Housing and Urban Development (HUD). It offers a more detailed examination of closing fees, and the process leading up to them. You can find this booklet by doing a Google search for “HUD settlement costs booklet.”