Closing costs are the additional charges that purchasers and sellers must pay in order to finalize a real estate transaction. Loan origination fees, discount points, appraisal fees, title search fees, title insurance, surveys, taxes, deed recording fees, and credit report fees are a few examples of these expenses. Three business days prior to a scheduled closing or settlement date, lenders are required by law to give buyers a closing disclosure.

When the ownership of the property is transferred from the seller to the buyer, closing costs take place. Depending on the value of the property, closing expenses may differ by area. Closing expenses are typically between 3% and 6% of the purchase price for homebuyers. At settlement, a $300,000 mortgage will cost between $9,000 and $18,000.

The nationwide average closing costs for a single-family property in 2021 were $6,905 with transfer taxes and $3,860 excluding taxes, according to a survey by ClosingCorp, a national firm specializing in these costs. By state, the highest closing costs incurred by the percentage of the sales price were in the District of Columbia at 3.9%. Missouri ranked lowest in costs at 0.8%.

Under the federal Real Estate Settlement Procedures Act (RESPA), the lender must also provide a closing disclosure statement outlining all closing fees.

Average closing costs for the buyer run between about 2% and 6% of the loan amount. That means, on a $300,000 home loan, you would pay from $6,000 to $18,000 in closing costs in addition to the down payment.

The most cost-effective way to cover the costs is to pay them out-of-pocket as a one-time expense. You may be able to finance them by folding them into the loan if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.

When buying a home, you can compare shops and negotiate some of the fees to lower your closing costs. And some states, counties, and cities offer low-interest loan programs or grants to help first-time home buyers with closing costs. Check with your local government to see what’s available.

The closing cost definition refers to a range of fees incurred by individuals for services related to completing a real estate sale and applying for a mortgage. The charges one must pay depend on the location, the property’s price, and whether they are refinancing or purchasing. The closing cost range is around 3% to 6% of the overall loan amount. So, for a mortgage worth $500,000, one can expect to pay $15,000 to $30,000.

Let us look at some standard fees included in these costs.

• Attorney Fee: This is the fee real estate attorneys impose to prepare and assess home purchase contracts.
• Courier Fee: The party handling the closing, i.e., the escrow company, attorney, or title company, receives this payment, depending on the state law.
• Application Fee: A lender charges this fee to process the home loan application.
• Credit Report Fee: Lenders impose this fee on homebuyers to pull their credit reports from the major credit bureaus. Some lenders receiving a discount from reporting agencies do not charge this fee.
• Escrow Deposit: Some lenders require individuals to deposit two months of mortgage insurance and property tax payments into an escrow account to finalize a transaction.
• Points: Also referred to as discount points, these are optional, upfront payments made to the lender to decrease the interest rate on the loan.
• Pest Inspection: This fee covers the cost of professional pest inspection services.
• Property Tax: Homebuyers must pay local property taxes due within sixty days of purchasing the property.
• Survey Fee: The surveying company charges this fee to check shared fences and property lines to confirm the property’s boundaries.
• Transfer Tax: The local or state government imposes this fee to transfer the property title to the new homeowner.
• Lead-Based Paint Inspection: Individuals pay a fee to a certified inspector to check whether the property has lead-based paint.
• Rate Lock Fee: This is an optional charge imposed by lenders to guarantee homebuyers a certain interest rate for a specific duration. This safeguards individuals from a sudden increase in interest rates.
• Title Search Fee: The title company charges this fee to analyze the property records.

One must remember that these costs do not include the down payment.

If a buyer wants to reduce such costs, they can ask the sellers to pay the expenses entirely or partially, depending on the negotiation. If sellers help buyers cover the closing costs, it is a win-win situation for both. This is because the seller can make a faster sale, and the buyer gets to pay a lower amount at closing. Individuals must remember that their bargaining power depends heavily on the market. They must ask sellers to contribute after understanding how much the latter can contribute.

In addition, one must note that if market conditions are in the seller’s favor, negotiating for too many concessions can lead to a rejection of the offer.

Besides negotiating with sellers, buyers may consider looking for lenders that offer discounts or do not charge any origination fee.

How To Calculate Closing Cost?

Various factors, for example, the size of the down payment, credit score, property location, etc., influence the closing cost. To get an idea of this cost, most lenders recommend estimating it to be 1% to 5% of the property purchase price. This means if the price is $800,000, the cost will range from $8,000 to $40,000. Individuals can also use a closing cost calculator to get an accurate estimate.

Read Also: Questions to Ask When Applying For a Mortgage

This calculator provides individuals with the following information:

• Projected Total Costs: The online tool displays the estimated total closing costs (in dollars). Moreover, it expresses the overall cost as a percentage of the total loan amount.
• Breakdown Of Costs: It shows a breakdown of the usual costs, including fees payable for home appraisal, loan origination, and title insurance.

Such a calculator’s default setting projects various charges included in the closing costs. That said, the fees vary widely. So if individuals know certain charges, they can enter them in the calculator to get improved results.

Let us look at this closing cost example to understand the concept better.

Suppose John takes out a loan of $600,000 to purchase a home from Andrew. According to the purchase contract terms, the former will pay the closing costs. The amount payable at the closing table is 4% of the loan amount, i.e., $24,000. This will include all charges and expenses included in such costs, for example, the survey fee, transfer tax, etc.

What is a Closing Disclosure Document?

The final document you will get before your mortgage closes is the closing disclosure. Before closing day, thoroughly review this five-page document to ensure that all the numbers appear to be accurate.

A legally required five-page statement of your final mortgage loan conditions and closing charges is known as a closing disclosure. It includes information on the conditions of your loan, your monthly payments, fees, and closing costs.

At least three business days prior to closing, your mortgage lender is required to give you the closing disclosure with the final information on your loan. This allows you the opportunity to assess the final terms and expenses in comparison to the details included in your loan estimate, the three-page document you received along with the mortgage offer.

You should compare the closing disclosure with the loan estimate to see if anything has changed. If anything is unexpected or incorrect, you have time to ask the lender to clarify before the closing.

The closing disclosure three-day rule, formally referred to as the “Know Before You Owe” mortgage rule or TRID (the TILA-RESPA Integrated Disclosure rule), went into effect in 2015. This regulation includes a requirement that you receive your closing disclosure three business days before closing. This rule was established to protect borrowers from surprises at closing.

By giving you three business days to review your closing disclosure, you’ll have time to check all the numbers and bring up any questions you might have before sitting down at the closing table. Take advantage of this time to look over all the terms of your mortgage loan, and talk to your lawyer, housing counselor or loan officer if you have any questions.

What is in the closing disclosure?

Loan terms	Check the figures and take note of whether the amounts of the following can increase after closing: the loan amount; interest rate; monthly payment including principal and interest; prepayment penalty, if any; and balloon payment, if any.
Projected payments	These add up to your monthly mortgage payment and include the principal, interest and private mortgage insurance (if applicable), as well as estimated escrow and estimated taxes, insurance and assessments, both of which can increase over time.
Costs of closing	This section shows your upfront costs, sometimes called “settlement costs.” It includes loan costs, lender credits and the amount you’ll be required to pay at closing.
Loan costs	This section includes charges such as an application fee, an origination or underwriting fee and any points. It also notes any items that are to be paid by the seller. The loan costs are categorized as “services that the borrower did not shop for” — including the credit report and appraisal — and those that the borrower did shop for, such as the settlement agent fee and title search.
Other costs	These include recording fees, transfer tax (if applicable) and insurance premiums due at signing.
Calculating cash to close	This table breaks down your costs at closing, including any deposits you’ve already paid, credits and anything that has changed since your loan estimate was provided.
Summaries of transactions	This provides a detailed look at your costs, including the home price, closing costs and the seller’s costs.
Loan disclosures	Here you’ll see legal language describing important characteristics of your loan, such as assumption, demand feature, negative amortization and escrow.
Loan calculations	This disclosure shows the total amount you are agreeing to pay over the life of the loan, including interest charges.
Other disclosures	This includes more details such as the appraisal, missed payments and other aspects of your loan.
Contact information	This includes details on how to reach all the parties involved in your loan.
Confirm receipt	Signing this page at closing indicates that you’ve received it.

What can and can’t change on the closing disclosure

When checking the closing disclosure, you need to know that some mortgage costs are allowed to change while others cannot. One thing that is certain: Lenders can’t deliberately understate your costs and then raise the prices at closing time.

In general, if any of the following was changed from your loan estimate or looks unfamiliar, contact your lender and ask for an explanation.

• Loan information – The majority of the time, this section should match your loan estimate. If it doesn’t, ask your lender why.
• Loan amount – Note that the loan amount can change, for example, if your closing costs were rolled in.
• Interest rate – If there is a change from the loan estimate and you locked your rate, ask for clarification from your lender.
• Estimated total monthly payment – This can change; be sure to ask for an explanation from your lender, if so.
• Closing costs/cash to close – These can also change.
• Services borrower did not shop for – Ensure there are no new services that were not on your loan estimate.
• Services borrower did shop for – If there are new services listed here, ask for an explanation from your lender on how these were chosen and why they were included.

Note that some closing costs cannot increase, such as fees paid to the lender or mortgage broker, or fees for required services that you did not shop separately for, or that you paid for from an affiliate of your lender or mortgage broker. Transfer taxes cannot increase, as well.

However, if there is a “change in circumstances” which requires a new loan estimate, these costs can change by any amount. A change in circumstances could be when you decide to get a different type of loan, put down a different amount, your home doesn’t appraise at the expected value, your credit file changes or your income documentation isn’t as expected.

Other closing costs can increase without limit, including prepaid interest, insurance premiums, initial escrow account deposits and fees for some third-party services. These costs are not controlled by your lender.

There is a third category of closing costs that are permitted to increase by up to 10 percent. These include recording fees and some third-party service providers. If there is a change in circumstances, these costs could increase by more than 10 percent.

If you’re concerned about how to afford closing costs, you can try negotiating with your lender or consider a no-closing-cost mortgage.