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Closing Costs – Explained

As a home buyer, one of the best days of your home buying journey will be closing day. That’s when the house officially becomes yours, and you typically get the keys to your home on that day or shortly afterward. So this is an exciting step to look forward to! But just keep in mind that closing day is also the day you’ll be expected to part with a lot of your cash, thanks to the closing costs that will be due that day.

On average, your closing costs will total about 2% to 5% of the cost of your home, meaning they could range from $4,000 to $10,000 on a $200,000 home. As you start saving up for that important day, it’s good to know what exactly you’re paying for. So here’s a brief breakdown of the typical closing costs you can expect to pay for on closing day.

Property-Related Closing Costs

Escrow fee: Among the first closing costs you’ll face is the fee to open escrow. This is a fee you pay to the escrow or title company for helping you close on your home. It’s usually between $300 and $700, depending on the price of the home.

Appraisal: The lender will require an appraisal to determine if the house you want to buy is worth the price it is listed for. If it’s worth less than the listed price, you might have trouble getting a home loan, as the lender doesn’t want to loan you money that it can’t get back if you can no longer afford the house. The appraisal typically costs $300 to $500.

Home inspection: It’s recommended that you get an inspection on the house you plan to buy. This way, an inspector can look for any damages that need to be repaired before closing day. Once you get the inspection report, you can either request that the seller repair the damage, or ask for a lower price on the house and then make the repairs once you move in. The inspection usually costs $300 to $500, depending on the location and square footage of the house.

Property taxes: Another item included in the closing costs is property taxes. If you have either city or county—or both—property taxes coming due within about 60 days of closing, you’ll likely be expected to pay them as part of your closing costs.

HOA fees: If the home you’re buying is in a neighborhood with a homeowners’ association (HOA), you might have to start paying the dues on closing day. In some cases, you might also have to pay an HOA transfer fee that covers the costs involved in transferring ownership of the house from the seller to the buyer.

Loan-Related Closing Costs

Application fee: The loan-related closing costs begin when you put in an application for a loan. This application fee can cost up to about $500, depending on the lender. It’s nonrefundable, so you’ll pay this even if you’re not approved for a home loan after all.

Attorney fees: Some states require buyers to hire a real estate attorney to review all documents, including the paperwork for the home loan. If you’re required to hire an attorney—or if you choose to do so—part of your closing costs will pay for these legal services.

Loan origination fee: You’ll pay this fee to the lender so you can get on the path to getting a home loan. The cost is usually about 1% of the home loan total. While some lenders don’t charge this fee, they often make up for it by charging higher interest to recoup the cost of processing your loan.

Loan-specific fees: Some of your closing costs are specific to the type of home loan you get, assuming you don’t get a conventional loan. For example, FHA loans require you to pay a mortgage insurance premium upfront, which is 1.75% of the loan. If you have a VA loan, you might have to pay a one-time funding fee at closing. And USDA loans usually require a guarantee fee of 1% on closing day.

Title search fee: Before you can close on a house, the title company first must search property records to make sure no one currently has a claim to the house you want to buy. To complete this step and ensure the title of the house is clear, you’ll pay about $75 to $100 for the title search.

Prepaid interest: You can expect to pay some interest on your home loan at closing. Generally, you pay the amount that will add up from the closing date until the date of your first house payment.

Credit report fees: Your closing costs will also incorporate the cost to pull your credit report to determine what home loans you’re eligible for and how much you’ll be approved for. This fee is typically about $30.

Discount points: Some buyers pay the lender discount points in order to get a reduced interest rate on their home loan. This process is also referred to as buying down the interest rate. In general, one discount point costs 1% of the amount of your mortgage, so it’s about $1,000 for every $100,000 you spend on the home loan. While not every buyer opts for discount points, paying these upfront can lower your monthly mortgage payments.

Insurance-Related Closing Costs

Private mortgage insurance application fee: If your down payment is not 20% or more of the home loan, you might need to pay private mortgage insurance (PMI). This is a monthly payment every month, but you’ll need to pay a small fee on closing day just to apply for PMI.

Upfront PMI premium: If you don’t want to pay PMI every month, you can pay the total upfront at closing, which will save you money in the long run.

Lender’s title insurance: Lenders often require you to pay a fee for insurance that will protect them in case a lien or ownership dispute appears on the house. While the title search usually discovers an issue like this, this insurance protects the lender in case the initial search missed it. The fee ranges from $300 to $2,000, with $1,000 being the average price.

Owner’s title insurance: This insurance policy protects the buyer in case someone disputes the ownership of the home. Owner’s title insurance isn’t usually required, but it is recommended for your protection.

Homeowner’s insurance: Your lender will require you to have homeowner’s insurance to protect the asset from fire, extreme weather, and other hazards. Though you’ll usually pay the premium of this insurance annually, you’ll need to pay the first year’s premium on closing day. The cost of the premium depends on different factors, such as the location and cost of the home, but the average is about $1,200.

These are the most common closing costs you’ll see in the home buying process, but note that they don’t all apply to every buyer. And some buyers will face additional costs unique to their situation. Your real estate agent and lender will be able to let you know which closing costs you’ll be responsible for so you’re prepared for closing day.

If you don’t have a real estate agent yet, let LemonBrew help! When you come to us for assistance getting the home buying process started, we’ll match you with a Partner Agent who will walk you through every step along the way. Plus, LemonBrew Lending can help you get the home loan you need, while LemonBrew Abstract will happily provide you with title and escrow services. So if you need any type of help as you buy a home, please contact us today!