You’ve found your dream home, agreed on a price, and secured your mortgage. But what about those mysterious “closing costs” everyone talks about? Closing costs are an essential part of the home-buying process, yet they often catch many homebuyers off guard. Knowing what to expect can save you from surprises and help you budget more effectively.
This guide explains what closing costs are, where they come from, how much they typically cost, and ways you can save money along the way.
What Are Closing Costs?
Closing costs are the fees and expenses homebuyers pay to finalize the purchase of a property. These costs are separate from the down payment and are usually paid during closing—the final step in the home-buying process when ownership officially transfers.
Closing costs cover a variety of services, such as those from appraisers, attorneys, and insurance providers. The total amount depends on factors like your loan type, location, and the housing market. On average, closing costs are 2%–6% of the home’s purchase price. For example, on a $900,000 home, closing costs could range from $18,000 to $54,000.
After applying for a mortgage, most lenders will provide a Loan Estimate, which breaks down the estimated closing costs, so you’ll have a clear idea of what to expect.
Common Closing Costs
Closing costs are not a one-size-fits-all affair. The specific fees you’ll face depend on your lender and state regulations. Below is a breakdown of some of the most common closing costs you might encounter as a buyer.
Loan-related Costs
- Loan Origination Fees: Charged by lenders for processing your loan, typically 1% of the loan amount.
- Discount Points: Optional prepaid interest to lower your mortgage rate. One point typically equals 1% of the loan amount.
- Prepaid Interest: The amount charged to cover interest between the closing date and your first mortgage payment.
Property-related Expenses
- Appraisal Fees: Covers a professional assessment of the home’s value, ranging from $300–$600.
- Home Inspection Fees: Ensures the property is in good condition and identifies potential issues, typically costing $300–$500.
- Pest Inspection Fees: Required in some states, especially with VA loans (~$100).
Title and Legal Costs
- Title Search: Covers a review to ensure there are no legal claims on the property. Costs can run between $300 to $500.
- Title Insurance: Protects against claims on the property title. Expect to pay 0.5–1% of the purchase price.
- Attorney Fees (if required by the state).
Taxes and Government Fees
- Recording Fees: Charged to update local government property records. The average cost is $100 to $250.
- Transfer Taxes: A local or state levy for transferring property ownership, usually$1.10 per $1,000 of home value in California.
Prepaid Costs
- Property Taxes: Buyers often prepay two to six months’ worth of property taxes, depending on the closing date.
- Homeowners Insurance: Lenders require proof of a year’s worth of insurance coverage upfront. Costs vary but average $1,000–$2,000 annually.
- Escrow Payments: Reserve funds held for property taxes, homeowners insurance, or mortgage insurance.Typically about 2–3 months’ worth of payments.
Miscellaneous Fees
- Credit Report Fee: Covers pulling your credit score, usually between $10–$100.
- Courier Fees for delivering documents, often around $30 to $50.
- Flood Certification to determine whether the property is in a flood zone.
- Homeowners Association (HOA) Fees: Applicable if the home is in an HOA-managed community.
With dozens of potential line items, it’s vital to carefully review your lender’s Loan Estimate and Closing Disclosure, which outline your specific fees.
Who Pays Closing Costs?
Responsibility for closing costs depends on negotiation and local market norms. Typically:
- Buyers pay for loan origination, appraisal, and inspection fees, as well as title insurance.
- Sellers often cover real estate agent commissions (5–6% of the sale price), transfer taxes, and any agreed-upon seller concessions, like covering part of the buyer’s closing costs.
Knowing what’s shared and what’s negotiable is key, so don’t be afraid to discuss these details with your real estate agent.
Ways to Reduce Closing Costs
While some closing costs are unavoidable, there are strategies to minimize your expenses:
1. Shop Around for Lenders
Not all lenders have the same fee structures. Some offer no application fees, discounted rates, or even waive origination costs. Secure multiple quotes to find the most competitive package.
2. Negotiate with the Seller
One option is to ask for “seller concessions,” where the seller covers part of your closing costs. This works best in a buyer’s market or if the home has been on the market for a while with little interest. Keep in mind that seller contributions are limited based on your loan type (e.g., up to 6% of the home price for FHA loans).
3. Close at the End of the Month
Prepaid interest charges are calculated from the day of closing to the first mortgage payment date. Closing near the end of the month reduces the number of days you’ll owe interest.
4. Use a No-Closing-Cost Loan
Some lenders offer loans with no upfront closing costs. However, this usually translates into a higher interest rate or rolling the fees into the loan balance.
5. Explore Assistance Programs
Many states, counties, and cities offer grants or low-interest loans specifically to help first-time buyers cover closing costs. Explore options in your area to see whether you qualify.
Plan Ahead to Avoid Surprises
Closing costs can feel overwhelming, but they’re just a small step toward owning your home. By learning about common fees, understanding typical costs in your area, and using a few simple strategies to lower expenses, you can make the process much easier.
Ready to make the move into a new home? SummerHill Homes can help. We have several new home communities throughout the Bay Area. Visit us online at SummerHillHomes.com to view our new home communities, available homes, virtual tours, and more.