From the day you start idly looking through real estate listings to the moment you sign the last piece of closing paperwork, the process of buying a house typically takes months. Much needs to happen during that time: showings, making an offer, completing a loan application, appraisal, and inspection. It’s enough to overwhelm even the most organized buyer.
Buying a home isn’t cheap – and not just because your house is likely to be the largest single purchase you ever make. Closing on a home is a costly endeavor too. According to Zillow, U.S. closing costs typically range from 2% to 5% of the sale price.
The good news is that closing costs aren’t solely determined by geography, nor completely set in stone from the moment you choose a lender. It’s possible to shop and compare for some individual components of your total closing bill, such as title insurance, and to meaningfully reduce the cost of items that you aren’t permitted to shop around for. At the same time, you’re responsible for paying some items up front at closing, before they’re technically due. These are known as “prepaids,” and they typically include escrow expenses such as private mortgage insurance (when your down payment is less than 20%) homeowners insurance (hazard insurance), and property taxes. You will need to bring sufficient funds to the closing to cover your prepaids. (part of the closing cost numbers).
Before getting into the essence of residential real estate closing costs, some definitions are in order:
There are numerous closing items your loan estimate is likely to outline, as well as some general tips to reduce your closing costs individually or in the total. While this is meant as a guide, your closing items and cost ranges could vary significantly from what’s described below, so it’s best to speak with a real estate agent , Gloria Benaroch or a real estate attorney before diving head-long into the buying process.
Before you choose your lender, you theoretically have total control over your closing costs. Your choice of lender is therefore of great consequence – though, as your loan’s interest rate and terms are likely to impact your home’s final cost more than your closing costs, you shouldn’t choose a lender offering less-favorable rates or terms simply because they don’t charge as much for a home appraisal or happily waive the origination credit check fee.
These are the common closing costs that you can shop for after choosing your lender. Many are listed in Section C on page two of your loan estimate:
Once you choose your lender, you yield some control over your closing costs. These are the common closing costs you typically can not change after choosing your lender.
Many are listed in Section B on page two of your loan estimate:
You need to pay these costs in advance of closing. Note that you may also be required to deposit an upfront escrow buffer to cover unexpected upward adjustments in tax, insurance, and HOA expenses. The buffer can either be built into your total prepaids or broken out as a separate line item.
Homeowners insurance (hazard insurance) is considered prepaid, as you need to pay one year’s premium before closing.
The common closing costs described above are required in most residential real estate transactions.
By contrast, some of the following costs are either required by law or deemed necessary by the buyer or advisable under certain circumstances – such as pest inspections where termites are common.
You can shop around for many of these items:
This is a strategy that actually works. By closing in the last week of the month, buyers can reduce the prorated mortgage interest share due at closing. On a loan that accumulates $20 interest every day, the buyer saves $500 by pushing closing back from the 1st day to the 25th day of a 30-day month.
Some lenders offer loans that roll closing costs into the principal, effectively financing them at your mortgage rate over the life of the loan. Rolling closing costs into your loan principal doesn’t actually reduce the amount paid toward your closing costs. In fact, it’s likely to increase the total cost of your home over the life of your mortgage, due to a larger principal and possibly a higher interest rate. It can dramatically reduce what you need to pay at closing.
Rolling closing costs into your loan is a good strategy if your loan amount is well below the home’s appraised value, meaning the additional principal won’t push your LTV above a level the lender is comfortable with. If the additional principal does push your LTV above 80%, you’ll be on the hook for a monthly PMI payment.
Rolling closing costs into your loan principal also makes sense if you’re planning to sell within a few years. Since monthly interest payments are higher with a rolled loan (due to a higher principal or higher interest rate), selling relatively early in your loan’s term reduces your total interest expense and mitigates the final cost of rolling your closing fees. On the other hand, when you remain in your new home for decades, rolling closing costs into your loan might not make financial sense.
Are you in the military, or were in the military and honorably discharged? There’s no reason to overlook the financial perks of the service.
VA loans are available to active-duty military members (after six months of service, except for National Guard and Reserve members), veterans, and spouses of service members who died on active duty or as a result of a service-connected disability. They come with some attractive financial benefits, such as the ability to originate a loan with no down payment. What’s more, regulations governing VA loans prohibit lenders from charging certain closing costs.
Reducing your down payment can free up lots of closing cash. There are two catches here.
First, the seller has to accept your offer. Sellers tend to favor offers with higher cash down payments, and they could view your offer with skepticism – especially when the local market is hot and the seller has multiple offers.
The other consideration is private mortgage insurance. The higher your LTV ratio, the longer you’ll be on the hook for PMI, which you’re required to pay until you approach 80% LTV.
You can expect closing costs to account for up to 5% of your home’s purchase price. The share of your costs paid up front, over time, or by others will depend on your ability to act on the tips described here. That ability, in turn, is likely to depend in part on factors beyond your control, such as the seller’s motivations and your local market’s temperature.
Once you accept that it’s not always possible to have total control over the closing process, you’ll be more calm about the whole transaction– and focus on trimming the expenses which you do have some control of.