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What Are Closing Costs And Who Pays Them?

Katie Ziraldo8-Minute Read
January 28, 2022

*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.

There’s no way around it: on closing day, your savings account is going to take a hit. For the most part, home buyers are prepared to fork over a chunk of cash to get the keys to their new home. But while you may have spent months or even years tucking money away for a sufficient down payment, you may not have spent too much time thinking about how to save for the fees that will make up your eventual closing costs.

If this sounds familiar, know that we’ve got your back. In this article, we’ll explore the various costs associated with closing and break down what prospective home buyers and sellers need to know ahead of time to set themselves up for success.

What Exactly Are Closing Costs?

Closing costs are fees buyers and sellers pay prior to wrapping up a real estate transaction. The fees are in addition to the purchase price of the property and may, in some instances, be rolled into the property loan.

These costs, which include things like appraisal fees, title insurance and origination fees, typically range from 3% – 6% of the home’s purchase price and must be paid on closing day. Three days prior to closing, a home buyer will receive a closing document which enumerates all the anticipated costs and fees due at closing.

The Common Closing Costs Buyers Face

When you’re buying a house, it’s easy to get wrapped up in the down payment. So, when the time comes to close on your new home, you may be wondering what it is you’re actually paying for. While some closing costs may vary depending on the type of property and loan, there are certain consistencies you can rely on.

The exact amount you’ll pay for these costs is based on the purchase price of the property, but let’s take a look at some of the most common closing costs you should expect: loan closing fees, property fees and insurance fees.

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Loan Closing Fees

Many of the fees you will encounter at closing have to do with the processing of the home loan. Some of these loan fees include:

  • Loan origination fees: This goes to your lender to cover the cost of processing and underwriting your loan.
  • Credit check fees: The lender will also charge to cover the cost of obtaining your credit report as well as the cost of a credit monitoring service that alerts the lender if your credit changes at all during the process.
  • Discount points: This is an optional cost you’ll incur should you choose to purchase discount points from your lender in exchange for a reduced interest rate. The cost of one discount point is equal to 1% of your loan amount.
  • Title search fees: A title search is completed prior to closing to find out if any other parties have a legal claim to the property. This includes making sure there are no unpaid liens on the property.
  • Attorney fees: If you live in a state that requires you to have a closing attorney prepare the paperwork for your closing, you’ll pay this fee.
  • Prepaid interest: At closing, you may have to pay for the interest that will accrue on your loan between the time that you close on the loan and the date of your first mortgage payment.
  • Rate lock fee: If your lender charged a fee to lock in your interest rate, you’ll pay this cost at closing.

Property Fees

There are also closing costs associated with the specific property you’re purchasing. These fees may include:

  • Annual assessment (HOA) fees: If your new home is a part of a homeowners association (HOA), you may be required to pay a one-time fee to cover upcoming HOA expenses. This is in addition to the monthly HOA fees you’ll pay while living in the home.
  • Appraisal fee: This fee covers the cost for a third-party appraiser to evaluate the property and determine its fair market value.
  • Escrow fees: You may be asked to put a certain amount of money upfront into escrow for things like property taxes or insurance premiums.
  • Property taxes: Your lender may require you to pay a certain amount of your property taxes upfront to be held in an escrow account. For example, your lender may require two months’ worth of property taxes to be paid at closing.

Insurance Fees

The third and final set of fees you’ll encounter has to do with getting insurance on the property. Depending on the type of property and home loan product, these fees may include:

  • Homeowners insurance: Lenders typically require borrowers to have homeowners insurance on their mortgaged property. At closing, you may be required to pay your annual or semiannual premium upfront.
  • Private mortgage insurance (PMI): Conventional loan borrowers will have to pay PMI if they put less than 20% down on the property. Typically, this will be paid each month as a portion of your mortgage payment, but you may also have the option to pay all or part of the cost of PMI upfront at closing to lower your monthly payments.
  • Mortgage insurance premium (MIP): MIP, the mortgage insurance program specifically for FHA borrowers, requires an upfront payment equal to 1.75% of your loan amount at closing.
  • VA and USDA funding fees: While mortgage insurance will not be required for these loan types, VA and USDA loans have their own funding fees. The USDA guarantee fee is equal to 1% of the loan amount at closing, while the VA funding fee will be a percentage of the loan determined by how much you put down.

Estimated Closing Costs

The Closing Costs Sellers Are Responsible For

While the buyer pays the bulk of the closing costs when purchasing a property, the seller will still have to pay a few of their own closing costs before the sale is final. In fact, seller closing costs are often higher than buyer closing costs.

What costs a seller will be responsible for at closing can vary depending on what the buyer and seller have agreed to. However, there are some common closing costs that have become standard for the seller to pay.

Real Estate Agent Fees

The seller is responsible to pay the real estate commission for both the buyer’s agent and seller’s agent. These fees are usually charged as a percentage of the sales price and taken from the proceeds of the home sale.

Title Insurance

The seller also typically pays for the buyer’s title insurance fees. Title insurance protects the buyer from issues that may arise around the property’s title, which shows who has a legal claim to the property. Mortgage lenders require borrowers to purchase a lender’s policy, which is charged as a one-time premium at closing, but borrower’s also have the option to purchase an owner’s policy for themselves, which is often paid as part of the seller’s closing costs.

Closing Costs Are Negotiable

Closing costs can’t be waived entirely, but they are negotiable to an extent. While most of the closing costs you’ll incur are services that are necessary for completing the mortgage application and home buying processes, you may be able to cut costs by negotiating to have the seller cover additional fees they ordinarily wouldn’t.

This is more likely to happen in a buyer’s market – where sellers are more inclined to negotiate with buyers and offer concessions as a way to entice the buyer to close. In a more competitive seller’s market, you may benefit more from offering to cover a portion of the seller’s closing costs. This makes the sale easier for them and may even encourage them to accept a slightly lower purchase price.

The Bottom Line

Paying closing costs on a loan is normal – but without knowing what to expect, what should be the exciting last step in the home buying process can quickly become overwhelming. Don’t go into the home buying process without thinking about what your potential closing costs will be, and if you can afford them alongside your down payment.

In a real estate transaction, both the buyer and seller will be required to cover certain fees, so take the time to understand these costs in advance and utilize your real estate agent to determine if market conditions are right to ask the seller to cover a portion of your closing costs.

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Katie Ziraldo

Katie Ziraldo is a financial writer and data journalist focused on creating accurate, accessible and educational content for future generations of home buyers. Her portfolio of work also includes The Detroit Free Press and The Huffington Post.