More than five million homes sold in the U.S. last year. Perhaps you would like to count yourself in that group this year and are already looking to buy a new home.
You undoubtedly know about costs like the mortgage and the down payment. But those aren’t the only expenses associated with buying a house. You’ll also need to pay closing costs.
You won’t be the first buyer to wonder, why are closing costs so high? We’ll explain closing costs here and why they’re as high as they are.
What Are Closing Costs?
Closing costs are all the expenses associated with buying a house, other than the price of the home. These fees can add up to anywhere from three to five percent of the purchase price.
The median home value in the U.S. is $226,300, so let’s use that as our example. At that price, you should expect to pay between $6,789 and $11,315 in closing costs.
These expenses are called closing costs because they’re due when you “close” on a house.
Why Are Closing Costs so High?
Those fees really add up, because there are many of them. Here’s a breakdown of the fees and expenses that are typically included in closing costs.
- Loan origination fee. This is what the lender charges to process the paperwork for your mortgage.
- Credit report fee. The lender will run your credit to decide whether or not to approve your loan.
- Underwriting fee. A fee to underwrite (guarantee payment) and evaluate your creditworthiness.
- Appraisal fee. The lender will have the home you want to buy appraised to make sure its value matches the amount of the loan you want.
- Home inspection fee. You’ll want to have the home professionally inspected to make sure there aren’t any structural problems.
- Title search fee. A title search will ensure the home is yours to buy and that there aren’t any liens.
- A survey fee to confirm the property’s boundaries.
- Private mortgage insurance is a fee that buyers pay if their down payment is less than 20 percent of the purchase price.
- Document recording fees for the deed and mortgage.
- Real estate agent commission.
Buyers should also plan on paying a deposit into an escrow account. This is typically two months worth of taxes and insurance to “hold” the house for you until you close.
How Will I Know What My Closing Costs Will Be?
Fortunately, there are laws that govern real estate transactions including closing costs. Your lender is required to provide you with your closing cost disclosure at least three business days before closing.
That will give you some time to review all the fees to make sure that every one of them is accurate. You might want to read additional info about calculating closing costs.
Hopefully, this answers the question a lot of people have, mainly, why are closing costs so high?
You may have heard about something called a “no closing cost mortgage”. It’s a little misleading because you still pay all those fees. The difference is, you can roll the costs into the mortgage, so you don’t pay them at closing.
It’s helpful for buyers who don’t have enough money to pay for everything at closing. However, if the costs are included in the mortgage, the buyer will pay interest on them.