What are closing costs and how much are they?

Whether you apply for a new home loan or refinance an existing mortgage, you can expect to incur at least a few fees. Knowing what closing costs cover and when you have to pay them can help you prepare when finalizing your mortgage.

Your closing costs depend on several factors, including your mortgage amount, the type of loan you get and the location of your home. Find out what closing costs you should expect to pay and learn how you could potentially reduce your expenses.

What are closing costs?

Closing costs are the fees you have to pay to finalize a mortgage. Both new home loans and refinance agreements require closing fees. While some of these expenses go to your lender, others go to your title company and other parties involved in the mortgage process.

Who pays closing costs?

As the borrower, you usually pay the closing costs. In some cases, you may be able to ask the seller to cover some of the costs. For example, if there's not a lot of competition in the housing market in the area you're looking to move to, the seller may agree to pay some of your closing costs to encourage you to move forward with the sale.

How much are closing costs?

Your lender is required to give you two documents outlining the closing costs for your loan. Within three days of applying for a mortgage, you'll receive a Loan Estimate that approximates your closing costs. Within three days of finalizing your mortgage, you'll receive a Closing Disclosure that confirms your costs.

Closing costs for conventional loans

If you take out a conventional loan, your closing costs typically include the following:

• Application fee: Lenders may charge this fee to process your loan application, and the amount varies by lender.
• Appraisal fee: This fee covers any required professional appraisal that determines the market value of the property.
• Assumption fee: If you plan to take over the seller's existing mortgage, you may have to pay an assumption fee. The cost depends on the terms of the original mortgage.
• Attorney fees: In some states, you have to pay a fee for an attorney to prepare your home purchase agreement and contract and review closing documents. The cost varies by state.
• Broker fee: If you use a mortgage broker, you can expect to pay a percentage of the loan amount as commission.
• Credit report fee:  Mortgages and refinances typically require a current credit report. Many lenders pass the fee along to you.
• Discount points: Many lenders allow you to purchase mortgage points upfront in order to lower the interest rate for your loan. For each discount point you buy, you'll have to pay 1% of the loan amount upfront.
• Flood certification: When your home is located near a flood plain, your lender may need documentation of its status. To get this certification, you may have to pay a fee for the Federal Emergency Management Agency (FEMA) flood determination.
• Origination fee: Lenders typically charge this fee to cover their administrative costs. In most cases, this fee equals up to 1% of the loan amount.
• Rate lock fee: Some lenders require you to pay a fee to guarantee your interest rate until closing. The fee varies based on your lender.
• Recording fee: fees paid to city or county to record your deed and mortgage documents.
• Survey fee: Some lenders may charge an average of $150 to cover the cost for a professional surveyor to confirm the boundaries of your land.
• Title insurance: This one-time fee offers protection if an ownership issue occurs due to a claim or lien that the title search didn't identify. Many mortgages include title insurance that covers both the borrower and the lender. The cost varies by state.
• Title search fee: Title companies charge a fee to search public records for liens and claims to the property. This search is required, and the fee amount varies based on your location.
• Underwriting fee: Some lenders have a fee for underwriting your loan, which includes vetting your financial and credit information for loan approval.

Closing costs for FHA loans

When you get an FHA loan, you have to pay most of the applicable fees from the list above, based on the requirements set by your lender or service provider. 

Closing costs for VA loans

Along with most applicable conventional loan fees, VA loans require a funding fee. This one-time payment ranges from 1.4% to 3.6% of the mortgage amount. The percentage depends on your down payment amount and whether you're a repeat VA loan customer. In general, VA borrowers with higher down payments have the lowest funding fees. Certain Veterans, including those with any VA disability rating, are exempt from this fee.

When do you pay closing costs?

No matter who covers the closing costs, most are typically paid when you close on your loan. Some fees such as the appraisal or application fee may be charged upfront. If you're responsible for the closing costs, that means you need to be ready to pay these fees in addition to making a down payment.

In some cases, you may be able to roll some or all of your closing costs into a refinance loan so that you can pay them off over time. Many conventional loans and government-backed loans allow you to wrap some closing costs into your refinance mortgage. You won't have to pay a large lump sum at closing, but your mortgage amount and monthly payment will be higher.

How to reduce closing costs

Before you finalize your mortgage, you may be able to lower your closing costs. Some of the most common ways to lower your closing costs include:

• Explore other loan types. If your closing costs seem too high, ask your lender about other loan options that may be more affordable. Request a breakdown of your upfront expenses and your total costs over time. Ask your lender if any fees are negotiable. With this information in hand, you can better identify the best option for your situation.
• Add closing costs to the loan. Paying closing costs upfront can be challenging, especially if you're also making a large down payment. To lower your upfront costs, consider rolling some of them into the loan so you can pay them off gradually. Be sure to ask your lender how this would impact your loan amount and monthly payments. Some lenders offer an option that allows you to pay a higher interest instead of closing costs.
• Consider lower or zero point options. Buying mortgage discount points lowers your interest rate and helps you save money over time, but it requires you to pay hundreds or thousands of dollars when you close. To decrease those upfront fees, think about buying fewer mortgage points and increasing your interest rate slightly.
• Ask the seller to cover the costs. Consider asking the seller to pay part of the closing costs, especially if the seller hasn't received competing bids. When a property has only one potential buyer, the seller has limited options and may be more motivated to cover closing costs.
• Request a no-closing-cost mortgage. Some lenders offer home loans with no upfront costs. Ask your lender for a cost breakdown so you can compare how much you'd save upfront to how much you'd pay over time.

If you notice substantial differences between the closing costs listed on the Loan Estimate and the Closing Disclosure, ask your lender for more information. Your diligence could help you identify unexpected expenses or excessive fees that could affect your ability to pay your closing costs.

Any home loan is likely to have at least some closing costs. In addition, you may need to bring additional funds to closing to cover additional costs such as homeowners insurance, property taxes and mortgage insurance. Depending on your loan type, you may have to pay additional mortgage insurance. Take time to understand which costs you can negotiate and when to ask the seller or lender to pay them. Speak to a Home Lending Advisor to learn more about closing costs.