How to Calculate Closing Costs – A Complete Guide

by | Apr 3, 2020 | Finance

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Buying a house is often considered to be one of the most stressful times in a person’s life for a number of reasons, but a significant part of that is the amount of money changing hands. And undoubtedly what adds to that stress are the mysteriously dubbed “closing costs” that pop up during this transaction.

What are closing costs? 

This term might be one of the more misleading terms in real estate, as closing costs include many different things that occur throughout the transaction of buying a house, and they aren’t all related to the actual closing process itself. 

That said there are a number of items that real estate agents typically refer to as closing costs. And some of these costs can be surprising and confusing, particularly if you are a first time homebuyer and haven’t gone through this process before. And then not only do you have to budget properly for your down payment, you also get hit with closing costs that you may not have even considered when you first started thinking about buying a house. 

How much are closing costs?

Closing costs can be considerable and can average roughly 2-5% of the purchase price of the house. On a $300,000 house for example, that could be $6,000 to $15,000. 

When your lender gives you a loan estimate for your loan within 3 business days of receiving your completed loan application, this will include what the closing costs on your future home will be. But these are just an estimate, and many of the listed closing costs can change. If they do change, you should receive a revised loan estimate so there are no surprises along the way, particularly at closing.

What factors affect closing costs?

There are many fees and costs that can arise throughout the house-buying transaction. Here are closing costs that you may see, but it’s not likely you’ll see all of these when you close:

  1. Appraisal costs – A home appraisal protects the buyer, ensuring the selling price matches the market value of the home you’re buying. Cost: $300-$400
  2. Credit report fees – A credit report is pulled to get the buyer’s credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan. Cost: $30-$50
  3. Discount points – Also called mortgage points or simply points, they are a form of prepaid interest available for the buyer when obtaining a loan. One point equals one percent of the loan amount. Borrowers can offer to pay a lender points as a method to reduce the interest rate on the loan, thus obtaining a lower monthly payment in exchange for this up-front payment. Cost: 1 point costs 1% of your mortgage amount, or $1,000 for every $100,000.
  4. Endorsements fees – Expands title insurance (Cost: $25 each) for the buyer to cover such possible things as: 
    1. Indirect Access and Entry for a property that’s not adjacent to a public street and needs to cross somebody else’s property, 
    2. Encroachments for structures built too close to another property
    3. Covenants, Conditions and Restrictions in case for example, perhaps local zoning regulations allow you to build a second accessory unit on your property. However, when the property was subdivided, the subdivision plat included a restriction that states only one structure can be built on the lot. In that case, the owner wouldn’t be able to build that second unit, unless a CCR endorsement is obtained.
  5. Escrow deposit for property taxes and mortgage insurance – Sometimes, the buyer is asked to put down two months of property tax and mortgage insurance payments at closing. Cost varies with regard to your taxes and mortgage. 
  6. FHA up-front mortgage insurance premium (UPMIP) – If you get an FHA loan for your house, you’ll be required to pay the UPMIP of 1.75% of the base loan amount. You are also able to roll this into the cost of the loan if you prefer.
  7. Flood certification – Where necessary, paid to a third party to determine if the property is located in a flood zone. If it is, you’ll need to buy separate flood insurance. Cost: $600
  8. Home inspection – The buyer verifies the condition of a property and checks for necessary, pre-closing home repairs for the seller to pay. Cost: $300-$400
  9. Home Owners Association (HOA) transfer fees – Seller pays for this transfer which will show that the dues paid are current, what the dues are, a copy of the association financial statements, minutes and notices. Cost: Varies based on amenities.
  10. Homeowners’ insurance – Covers possible damages to the buyer’s home. Cost: Expect to pay roughly $35 per $100,000 of home value per month.
  11. Lead-based paint inspection – Evaluates lead-based paint risk at the buyer’s home. Cost: $300
  12. Lender fees for processing and underwriting – Drawing up the paperwork, fact-checking and organizing something as big as a 30-year mortgage loan (or other term like 15-year) takes a lot of work. That behind-the-scenes work is covered by the underwriting and processing fees. Sometimes these are included for the buyer in the origination fee, sometimes they’re not. Cost: When charged apart from origination, can be $400-$900.
  13. Origination fee – This is a charge by the lender to the buyer for starting up (hence “origination”), evaluating and preparing your mortgage loan. You should expect to pay roughly 0.5-1% of the amount you’re borrowing to buy a house. A $300,000 loan, for example, would result in a loan origination fee of $1,500 to $3,000.
  14. Pest inspection – Covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans for the buyer. Cost: $100
  15. Prepaid interest – Most lenders will ask the buyer to prepay any interest that will accrue between closing and the date of your first mortgage payment. Cost: Depends on the value of your mortgage. 
  16. Private Mortgage Insurance (PMI) – If you’re making a down payment that’s less than 20% of the home’s purchase price, you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing. Cost: 0.5%-1% of total mortgage loan amount per year. 
  17. Property tax – Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing by the buyer. Cost: Varies by area. 
  18. Reconveyance fee – The reconveyance fee the seller pays will be enough to cover the charges for recording the mortgage and deed, and those costs can vary. Cost: $50-$65
  19. Survey fee – This fee goes to a survey company to verify all property lines and things like shared fences on the property. Not required in all states. Cost: $350
  20. State government document transfer – This is paid by the buyer when the title passes from seller to buyer. Cost $250
  21. Title insurance – Title insurance protects you against issues that may come up connected to the title of the property you’re buying. Since the home and the land it’s on have likely changed hands several times, it’s possible that somewhere along the way, something went wrong. Whether it’s a forged signature or a tax evasion issue, title insurance makes sure you won’t be responsible for someone else’s legal issues. Cost: Averages $1,000 but varies based on value of house.
  22. Veterans Administration (VA) funding fee – If you have a VA loan, you may be required to pay a VA funding fee at closing (or you can roll this fee into the cost of the loan if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home loan program, however some borrowers are exempt from this fee. Cost: 2.15% of the loan with 0 down payment.
  23. Wire and courier fees – This covers the cost of transporting/wiring the buyers documents to complete the loan transaction as quickly as possible. Cost: $25-$50

What can people do to decrease closing costs? 

Many closing costs are negotiable, and some aren’t even necessary. Understand that you can shop around and hopefully find other lenders willing to offer you a loan with lower fees at closing. Here are some other things to consider:

Participate in a loyalty program

Some banks offer help with their closing costs for buyers if you use that bank to finance your purchase. It’s the bank’s way of offering a reward for being a customer.

Close at the end of the month 

If you close at the beginning of the month, say April 6 (a month with 30 days), you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.

Get the seller to pay

Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing-cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller. However, don’t expect this to happen in hot markets where inventory is scarce.

Bake the closing costs into the loan

Mortgage lenders charge more for this, but if you don’t have the cash, it’s a way to get into the house with less cash upfront. You may want to consider a no closing cost mortgage. With this type of mortgage loan, the lender covers the fees, but you’ll be paying a higher interest rate for the duration of the loan, which will mean larger mortgage payments.

Consider your military benefits

Service members and veterans may qualify for funds to help them purchase a home. These benefits are not limited to the VA loan. 

Consider your union benefits

AFL-CIO members can get help purchasing or refinancing a home with closing-cost discounts and rebates from the Union Plus Mortgage program.

Apply for a Federal Housing Administration (FHA) loan

Buyers with lower incomes can apply for an FHA loan and can get help from interested third parties including real estate agents, sellers, and mortgage brokers, who can pay up to 6% of the new loan amount. FHA loans are also more lenient with credit scores. Borrowers with a credit score of 580 or higher are likely to qualify, while traditional lenders require a credit report to be 620 or higher.

Consider Gemtrago and Signloc 

Buyers can minimize costs working with lenders like Gemtrago that don’t charge origination, application, or appraisal fees while still offering the lowest rates and highest level of service. And Signloc has some of the lowest title and escrow rates in the country. 

How are closing costs paid?

Although as a buyer, you’ve already paid some of these costs already, the remainder you need to pay at closing along with submitting your down payment for your house. 

These costs would typically be paid with a cashier’s or certified check, since they’re both guaranteed funds. However, your lender should provide you with specific instructions regarding what form of payment to bring to your loan closing, as well as the amount of money you owe.

Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor's degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.

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