What’s Included in Closing Costs—and How to Prepare for Them
What’s Included in Closing Costs—and How to Prepare for Them
When buying a home, many first-time buyers focus primarily on the down payment, but that’s only part of the financial picture.
Another significant expense to plan for is closing costs, which can add thousands of dollars to your homebuying budget.
Knowing what these costs include and how to prepare for them can prevent unwelcome surprises and ensure a smooth transaction.
What Are Closing Costs?
Closing costs are the fees and expenses you pay when finalizing a real estate transaction. These costs are typically due at the closing appointment, when the property officially transfers from the seller to the buyer.
While the total amount varies depending on location, loan type, and home price, closing costs usually range from 2% to 5% of the home’s purchase price.
For example, on a $350,000 home, you could expect to pay between $7,000 and $17,500 in closing costs.
Common Closing Costs to Expect
Here’s a breakdown of the typical fees and services included in closing costs:
Loan Origination Fees: Charged by your lender for processing your mortgage application. This may include underwriting and administrative costs.
Appraisal Fee: Paid to a professional appraiser to determine the home’s fair market value, required by most lenders.
Credit Report Fee: Covers the cost of pulling your credit report to evaluate your loan eligibility.
Title Search and Title Insurance: Ensures the seller has the legal right to sell the property and protects you from future claims against the title.
Escrow Fees: Paid to the escrow company handling the funds, documents, and legalities of the sale.
Recording Fees: Charged by your local government to record the new ownership of the property.
Survey Fee (if applicable): Verifies the property’s boundaries.
Homeowners Insurance: Typically, the first year’s premium is paid in advance at closing.
Property Taxes: You may need to reimburse the seller for prepaid property taxes, or prepay a portion yourself into escrow.
Private Mortgage Insurance (PMI): If your down payment is less than 20%, some lenders require PMI, and the first premium may be due at closing.
How to Prepare for Closing Costs
Start Saving Early
In addition to saving for a down payment, start putting aside money for closing costs as soon as you begin your home search. Factor this into your overall homebuying budget.Request a Loan Estimate
Your lender is required to provide a Loan Estimate within three business days of receiving your application. This document breaks down your expected closing costs and helps you compare offers from different lenders.Negotiate With the Seller
In some cases, especially in a buyer’s market, you may be able to negotiate for the seller to cover part of your closing costs. These are called seller concessions.Look for Lender Credits
Some lenders offer credits toward closing costs in exchange for a slightly higher interest rate. This can be a useful strategy if you’re short on cash but plan to refinance or sell in a few years.
Welcome Home!
Closing costs are an essential part of the homebuying process, and being financially prepared makes all the difference.
By understanding what’s included and planning ahead, you can approach your closing day with confidence—and with your budget intact.
