What are closing costs?
If you’ve purchased a home before, you know that the purchase price is just one of many costs associated with the home-buying process. Some of the most important costs are the closing costs. In this glossary, we’ll give a breakdown of what closing costs are, how much you can expect to pay, and much more. Keep reading to learn all about closing costs.
Closing costs refer to additional fees buyers and sellers must pay in addition to the cost of buying or selling a house. These costs are often the final step in the real estate transaction process and can include:
- Fees for the loan.
- Appraisal fees.
- Title searches.
- Title insurance.
- Deeds and deed recording fees.
- Cost to run credit reports.
By law, lenders are required to show these costs in a loan estimate form within three days of the home loan application.
How much each buyer will pay for closing costs depends on a few factors, including the purchase price, down payment percentage, and interest rate, as well as their credit score. But, you can generally expect to pay about 4% of the purchase price.
Closing costs case study
Isla and Maxwell are so excited to buy their first home. They have a budget of $325,000 and have found a perfect fixer-upper for $265,000. They’re excited that they have found something within their budget and that the seller has accepted their offer. Thinking they’re ahead of the game, Isla starts purchasing furniture for the new home. Then, her bank calls and tells her that they need to be prepared to pay $10,000 in closing costs. Now the couple is quite worried because they have already spent a great deal of their savings on the inspection, down payment, and new furniture for the home. Isla’s mortgage lender tells her not to worry. If they don’t have the cash upfront for the closing costs, they can roll them into their mortgage.
The bottom line
Closing costs are an essential—yet often dreaded—part of the real estate transaction. They account for all of the small parts that make up a successful real estate closing, from the mortgage application and credit checks to the appraisal. It’s important to not forget to budget for closing costs when you purchase a home, which is generally about 4% of the total purchase price but can fluctuate based on the local market and a number of other factors.