1. What are Closing Costs?
Closing costs are processing fees paid to lenders, title companies, and municipalities to close your mortgage. They typically range from 2% to 5% of the total purchase price of the home. On a $400,000 purchase, expect $8,000 to $20,000 in closing costs. Lenders are required to provide a Loan Estimate (LE) within three days of application outlining these fees.
2. Common Fee Breakdowns
Lender fees include origination charges, discount points, underwriting fees, and credit report fees. Third-party fees cover home appraisals, surveys, title searches, and title insurance. Government fees include recording taxes, transfer fees, and local deed recording stamps.
3. Prepaids and Escrow Accounts
At closing, lenders require prepaying property taxes and homeowners insurance premiums to establish an escrow account. This ensures funds are available when county tax bills and insurance policies renew. Typically, lenders collect two to three months of taxes and insurance up front as reserves.
4. How to Minimize Closing Expenses
You can request a seller concession (where the seller pays a portion of closing fees, capped at 3% to 9% depending on loan type and down payment). Alternatively, you can opt for a 'no-closing-cost' loan where the lender covers fees in exchange for a slightly higher interest rate.