Mortgage Closing Costs: A Complete Guide for 2023

Closing costs are the fees charged to process, document, and finalize a new home loan. They are paid at closing and are in addition to your down payment. Closing costs typically range from 2% to 5% of the total loan amount. For a 6,000 to $15,000 in closing fees.

Understanding these costs is important when budgeting for a home purchase. This comprehensive guide provides an overview of common closing fees, tricks to lower costs, and tips for first-time homebuyers.

Typical Closing Costs for Buyers

Closing fees can be divided into recurring costs you pay every month and one-time costs charged at closing. The lender breaks down these charges on a document called the Closing Disclosure.

Recurring Costs

• Mortgage insurance – Protects the lender if you default. Usually required for loans with less than 20% down.
• Property taxes – Paid to your local government to fund public services.
• Homeowners insurance – Covers damages to your property. Lenders require this to protect their investment.
• Interest – The cost to borrow money from the lender. A portion goes towards interest in every mortgage payment.
• PMI – Stands for private mortgage insurance. Another way lenders protect themselves on small down payment loans.

One-Time Closing Costs

• Origination fee – A percentage of the loan charged by the lender, around 1% of the total amount. This covers processing costs.
• Points – Prepaid interest you can buy down the rate. Usually 1 point = 1% of the loan amount.
• Appraisal fee – Paid to the appraiser who ensures the home is worth the sale price. Typically 500.
• Credit report fee – Covers the cost of running your credit report. Usually around $50.
• Title fees – Includes title insurance, search, exam, and closing fees. Usually around 1,500.
• Recording fees – Charged by local government to record change of home ownership.
• Survey fee – Only required if mortgage survey of the property is needed. Around 200.
• Pest inspection – Some locations require an inspection to check for termites or other pests. About $100 on average.
• Homeowners insurance – First year of homeowners insurance premium. Varies based on property value and location.
• Property taxes – Prorated property taxes for the portion you own the home.
• HOA fees – Pro-rated homeowners association dues you will owe at closing.

Below is a comparison of typical closing costs for a $300,000 mortgage:

As you can see, closing fees can vary widely depending on your specific transaction. It pays to shop around and compare quotes from multiple lenders.

Strategies to Lower Closing Costs

The best way to reduce closing costs is to shop around with various lenders early in the home buying process. Here are some other tips that can result in significant savings:

• Negotiate with the seller – Ask the seller to cover some fees or closing costs as part of the offer. This is common practice in competitive markets.

• Pay discount points – Buying down the interest rate saves on interest payments long-term. Just make sure the break-even period works with your plans.

• Increase your down payment – Putting down more than 20% avoids private mortgage insurance and lowers your loan amount.

• Choose a government-backed loan – FHA and VA loans have lower funding fees than conventional loans.

• Use down payment assistance – There are state and local programs that provide grants to cover closing costs and down payments.

• Get an appraisal waiver – If you make a large down payment, the lender may waive the appraisal, saving 500.

• Ask about lender credits – Some lenders offer credits toward closing costs, usually by raising the interest rate slightly.

• Shop around – Compare quotes from multiple lenders. Online lenders tend to have lower fees than brick-and-mortar institutions.

• Compare title fees – You can save 20-50% on title insurance by shopping around and comparing quotes.

Ask your lender for an itemized Loan Estimate early in the process so you can identify areas to save before you get to the closing table. Being an informed buyer is key to lowering your closing expenses.

Closing Costs for Refinances

When refinancing your mortgage, closing costs are generally higher – usually between 3% to 6% of the loan amount.

Many of the same third-party fees apply, like title insurance, appraisal, and credit report fees. You will also pay origination charges to the new lender.

Here are some refinance-specific costs to be aware of:

• Interest differential – Covers interest between closing date and when the new loan starts accruing interest.

• Funding fee – FHA and VA loans have an upfront funding fee, typically around 1.5% of the loan amount.

• Prepayment penalty – If you refinance before the penalty period in your existing loan expires, expect to pay 1% to 5% of the balance.

• Mortgage taxes – Some states charge a mortgage tax on new loans. For example, New York’s is 0.5% to 1.8% of the loan amount.

• Points – More points to buy the rate down makes sense on a refi if you plan to keep the home long term.

To make a refinance worth the costs, you want to aim for at least a 0.5 to 1 percentage point drop in your interest rate. Refinancing from 6% down to 4.5% interest could save over 200,000 balance.

Ask the lender to provide a detailed closing cost estimate before starting a refinance so you can weigh the upfront costs versus monthly savings.

Closing Cost Tax Deductions

Many of the closing costs involved in buying or refinancing a home can be deducted on your federal income taxes. These tax write-offs help offset the impact of high upfront fees.

Deductible expenses include:

• Loan origination fees
• Appraisal fees
• Credit report charges
• Lender-paid PMI premiums
• Owner’s title insurance policy
• Recording and transfer fees
• Surveys
• Legal fees

Most closing costs are deducted on Schedule A of Form 1040 as itemized deductions. Things like mortgage interest, property taxes, and PMI are deducted directly on Form 1040.

Consult your tax advisor to maximize deductions and get a clearer picture of the true net costs involved in financing your home.

First-Time Home Buyer Closing Costs

First-time homebuyers often face higher closing costs, especially on FHA and VA loans with funding fees. Down payment assistance programs can cover these expenses for eligible borrowers.

Here are some options to look into:

FHA Loans – Require just 3.5% down and allow gifts for the down payment. MIP funding fee is 1.75% of the loan amount.

VA Loans – No down payment needed for qualified veterans. Funding fee is 2.3% for first-time users.

USDA Loans – 100% financing available in rural areas. Guarantee fee is 1.0% of the loan amount.

Down Payment Assistance – State and local groups provide grants averaging $5,000 to cover down payments and closing costs. Research options in your state.

Seller Contributions – Ask the seller to credit 3% to 6% toward closing fees. Very common for new home builders.

Lender Credits – Shop lenders who offer credits at closing in exchange for a slightly higher rate.

Gifts – Friends or family can gift money toward your down payment and fees. No repayment required.

First-time buyers should get quotes from multiple lenders and loan programs to find the most cost-effective option. Your dream home may be more affordable than you think!

FAQ on Mortgage Closing Costs

Can closing costs be negotiated?

Yes, in competitive markets you can request the seller pay some closing fees to help get the deal done. Third party fees like title insurance can also be negotiated by comparing quotes from different providers.

Do closing costs go towards down payment?

No, closing costs are fees charged by lenders and third parties to process the loan. The down payment only covers the portion of the home’s purchase price you pay upfront.

Can closing costs be rolled into loan?

Yes, most lenders allow you to finance closing costs by including them in the loan amount. This avoids out-of-pocket expenses but increases your monthly payments.

Who pays for appraisal fee?

The homebuyer traditionally pays for the appraisal, but this can be negotiated with the seller. If the deal falls through after the appraisal, you can ask to split the fees evenly with the seller.

How can I deduct closing costs on taxes?

Deductible closing fees can be itemized on Schedule A of Form 1040. Things like PMI and loan origination fees get deducted directly on Form 1040. Consult a tax pro to maximize deductions.

Are closing costs cheaper for new construction?

Yes, builders will often discount closing fees or provide credits to incentivize the purchase. Closing on a new build also avoids fees for title searches or owner’s title insurance.

Can lenders provide closing cost estimates?

Yes, lenders are required to provide a Loan Estimate within 3 business days showing all expected closing fees. This helps buyers plan their budgets.

Understanding the ins and outs of closing fees and your options to reduce costs can help you stay on budget and buy your dream home!