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When you purchase a home, your down payment isn’t the only upfront cost. You’ll also pay a series of costs related to your loan, called mortgage closing costs, which are due on closing day. These can really add up, but you may be able to reduce them. Here’s what you need to know about mortgage closing costs.
After finding your dream home, agreeing on a price with the seller, and securing a mortgage loan, you're likely facing the reality of mounting expenses, especially those pesky closing costs. These costs vary significantly based on several factors, with the home's price and your location being primary determinants. Charged by lenders and other vendors, these fees can accumulate rapidly.
Typically, closing costs range between 2% and 5% of the home's purchase price, as noted by Freddie Mac. For instance, purchasing a $350,000 home could mean paying between $7,000 and $17,500 in closing costs, excluding any real estate agent commissions if applicable.
Closing costs for a mortgage encompass all expenses tied to the loan application and the finalization of a real estate transaction. These costs can be divided into those related to the property itself and those associated with the mortgage lender's services and the paperwork involved in the transaction.
In most home sales, both buyers and sellers typically share the responsibility of paying closing costs. The closing costs paid by sellers are usually deducted from the sale proceeds, while buyers often cover their portion out of pocket.
For example, if you're purchasing a home priced at $400,000, you might expect to pay closing costs ranging from $8,000 to $20,000, assuming the costs are between 2% and 5% of the purchase price. This amount would include various fees such as the appraisal fee, lender's title insurance, and escrow account funds. However, it’s important to remember that these costs can vary based on your location, the loan type, and the agreements.
Mortgage closing costs typically range from 2% to 5% of your total loan amount. This means that the price tag for your closing costs hinges on several factors:
Historically, these costs have fluctuated. For instance, in 2021, the average closing costs for purchasing a single-family home were $6,905, as reported by the real estate data firm Closing Corp. Meanwhile, the average closing costs for refinancing stood at $2,375. In comparison, the average closing costs for a single-family home in 2020 were slightly lower, at $6,087 including taxes, or $3,470 excluding taxes.
These figures underscore how closing costs can vary significantly based on market conditions and geographical location, emphasizing the importance of understanding the historical context to better anticipate potential expenses.
Regardless of whether the homebuyer or seller is responsible, closing costs typically encompass:
In most real estate transactions, the buyer is responsible for paying the majority of closing costs, while the seller covers some as well. Buyers can sometimes negotiate with the seller to cover a portion of their costs, known as "seller concessions," but this is more likely when the seller isn't receiving multiple offers.
These costs can vary based on factors like the home's price, location, and loan type, so it's essential for buyers to understand their potential expenses and explore ways to reduce them.
In certain real estate transactions, sellers may agree to cover a portion or even all of the buyer's closing costs. This is often referred to as "seller concessions" and can be a strategic move to make a property more attractive to potential buyers, especially in a buyer's market where there is less competition.
Consider a scenario where a buyer is interested in purchasing a $300,000 home. The buyer estimates that their closing costs will amount to approximately $9,000. To make their offer more appealing, they negotiate with the seller to cover these costs. The seller agrees to this arrangement, effectively reducing the buyer's out-of-pocket expenses at closing. This agreement might be structured so that the seller covers specific fees, such as the transfer tax, attorney fees, or even contributes to the buyer's escrow account funds for property taxes and insurance.
This strategy not only helps the buyer by lowering their immediate financial burden but also benefits the seller by potentially speeding up the sale process and ensuring a smoother transaction. However, it's important to note that the amount and type of closing costs a seller is willing to cover can vary based on the local real estate market, the home's price, and the negotiation skills of the parties involved.
Reducing closing costs can significantly ease the financial burden of purchasing a home. Here are some effective strategies to help you minimize these expenses:
By employing these strategies, you can effectively lower your closing costs, making the home buying process more affordable and manageable.
The silver lining? Many closing costs are open to negotiation. Here are six strategies to help reduce these expenses, whether you're buying a new home or refinancing your current mortgage.
Lenders typically impose various fees associated with the loan, such as origination and underwriting fees. While it might be challenging to eliminate these fees entirely, it's worthwhile to inquire if your lender can reduce them or provide a discount. Some lenders even offer incentives to attract borrowers, potentially saving you hundreds of dollars just by asking.
Additionally, it's beneficial to compare offers from different lenders. If possible, obtain loan estimates from multiple lenders before submitting your application. Since pricing can change frequently, try to get these estimates on the same day and time for the most accurate comparison.
Who covers which closing costs can vary, but sellers are generally responsible for certain expenses. This can differ by state, so it's essential to know what the seller typically pays. You might be able to negotiate with the seller to cover some of your costs, known as "seller concessions," which appear as "seller credits" on the loan estimate form.
This approach might be less effective in a strong seller's market, where sellers have more leverage. However, it's still a common practice. According to the National Association of Realtors, 24% of home sellers offered some form of concession in 2024, compared to 33% in 2023.
Some lenders offer no-closing-cost loan options, typically in exchange for a slightly higher interest rate. While this option saves you from paying upfront at closing, it may cost more over time due to the increased interest rate.
Many local governments offer down payment and closing cost assistance programs for eligible homebuyers, particularly first-time buyers. If you qualify, these programs can help cover some closing costs. Check with your real estate agent to see if they know of any suitable programs.
If possible, schedule your closing for the end of the month. This can reduce your upfront cash requirement by minimizing the number of days per diem interest is applied before your first mortgage payment, typically due on the first of the month.
If you’re prepared for mortgage closing costs well before they hit, you won’t be surprised by the final figure. Don’t settle for the first thing your lender quotes you, and don’t hesitate to shop around to compare costs from other lenders early on in the process. You can also try to negotiate some of these costs, try to get the seller to help with others and look into state or local programs for more closing cost assistance.
Orion and our brokers help homeowners in many states, and we've found that closing costs are more expensive in states with high costs of living and home prices. Fortunately, good brokers work with your clients so that they won't owe tens of thousands of dollars in closing costs, and Orion can suggest ways for your clients to pay for closing costs on a mortgage in addition to offering very competitive mortgage rates.
The majority of borrowers pay for closing costs in cash, but that are some considerations. Good brokers know how closing costs can eat into savings at a time when your client may have little extra money to spare. Clients don't want to dedicate too much of their savings to paying for closing costs just to risk depleting their emergency fund, should an unexpected expense arise.
Another common way to cover closing costs for a home purchase is to ask the seller for concessions during the negotiation process. Instead of offering a lower price for the house your client wants, they could offer the full asking price and request that the seller absorbs 5% in closing costs. The maximum dollar amount of concessions they can ask for varies depending on the type of mortgage loan they're approved for (FHA loans: 6%, USDA loans: 6%, VA loans: 4% Conventional loans:3-9%). But in today's real estate market it may be difficult to negotiate closing costs with a seller. Asking for concessions may make your client's offer less appealing, and a seller who gets multiple bids on their property is likely to disregard any offers that include concessions.
Lastly, some401(k) providers allow your client to take a loan against their retirement account or make an early withdrawal in order to pay for costs associated with buying a house, including mortgage closing costs. This is not used very often, and Orion advises them to speak with an accountant. Generally, your client won't have to pay taxes or an early withdrawal penalty as long as the loan is repaid on time, they can borrow up to 50% of the vested balance or up to$50,000, whichever is less, and they'll pay interest back to themselves. But they'll have to pay income taxes on the amount, as well as a 10% early withdrawal penalty if they're younger than 59 and ½.
Helping you and your clients decide on options like this is just one of the ways Orion and our AEs can help!
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