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Mortgage closing costs: What they are and how much you'll pay

It's a significant expense that you'll want to budget for.

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Don't let closing costs come as a surprise when you sign papers and plan to move. 

Martin Chan/Getty

It's easy for homebuyers, especially first-timers, to focus on the sticker price of a home or the down payment amount, without factoring in "closing costs." A vague term that covers a collection of fees, closing costs can be tricky to nail down and yet may add up to a significant expense -- usually ranging from 2% to 5% of the amount you're borrowing.

As the name infers, closing costs are tallied up just as you're finalizing your mortgage and about to take over the property title. Most are paid by the buyer, but the seller may be on the hook for a few too. 

Even if you're taking advantage of historically low interest rates, closing costs can be significant and are worth including in your home-buying budget. Here's what you need to know to avoid any last-minute surprises.

What are mortgage closing costs? 

Closing costs refer to the upfront fees charged to secure a loan and transfer the ownership of a property, according to the Consumer Financial Protection Bureau. Sometimes they're referred to as settlement costs.

They cover a lot of behind-the-scenes transactions and paper pushing. The realtors, bank, title company, appraisers and document-drafting lawyers all need to be paid. Some common closing costs include title insurance, government taxes, appraisal fees, tax service provider fees and prepaid expenses, according to a list published by the Consumer Financial Protection Bureau.

The buyer usually ends up paying most of these costs -- but standard arrangements vary among states and from deal to deal. Sometimes, a buyer can negotiate to have the seller pick up some of the closing costs in exchange for a higher overall sale price. Buyers may also have a lender chip in on closing costs. But, again, that could result in a higher loan amount or interest rate.

What do closing costs pay for? 

Your closing costs will depend on your particular transaction and can be impacted by interest rates, local insurance fees, tax rates, local appraisal fees and other factors. But here's a general breakdown of some of the common expenses covered by closing costs: 

Title insurance: This protects lenders from financial losses stemming from problems related to a property title, such as liens or ownership conflicts.    

Government taxes: These could include the property tax on the home, local government fees -- such as one for recording the sale of the property -- and a tax for transferring the title from the seller to the buyer. 

Appraisal fees: These are charged by an appraiser for coming to the property and assessing the home's value to determine an appropriate loan amount. 

Tax service provider fees: These help pay for third parties to keep track of property tax payments and other tax monitoring duties. 

Prepaid expenses: These are items like homeowners insurance, property taxes and interest until the first payment is due. 

How much are closing costs? 

Most lenders and industry watchers will tell you that your closing costs, on average, will cost you somewhere between 2% and 5% of the amount borrowed. 

The national average closing costs for a single-family property were $5,749 including taxes and $3,339 excluding taxes in 2019, according to ClosingCorp, which analyzes closing cost data for the industry. 

For a more specific estimate, we used a closing cost calculator from banking service BBVA to show what these fees might look like for a $250,000 loan. After entering a 20% down payment, 30 years for the term and a 4% interest rate, the total amount of closing costs was calculated at $7,042.

What are closing documents? 

One of the key documents you'll get before the final signing is the closing disclosure, which outlines the details about your loan, including your closing costs. The lender should provide you with that document three business days before the scheduled loan closing.

It's very important to review this document to make sure all the information is correct and that the terms of the loan are accurate and clear. This closing disclosure explainer might help you as you review the document. Among other advice, it mentions making sure that closing costs match the most recent loan estimate. 

Other important closing documents include:

Promissory note: a legal document stating that you will repay your mortgage.

Mortgage, security instrument or deed of trust: gives the lender the right to take your property by foreclosure if you do not pay your mortgage according to the terms you've accepted.

Initial escrow disclosure statement: details the charges that you pay into an escrow each month.        

Right to cancel form: outlines the rules for when and how you can cancel your loan, usually used as part of the refinancing process.

If you have questions about any of these, ask your lender, broker, or lawyer for help. 

Are closing costs tax deductible?

The IRS says the only closing costs you can deduct are the points you pay to reduce your home mortgage interest rate and real estate taxes you're required to pay upfront. If you itemize, you can deduct these costs during the year you buy your home.

The IRS also has a list of closing costs you can add to the basis of your home. They include things like legal and recording fees and surveys. 

Tax rules are always changing, which is why we advise talking to a tax professional about what you can and can't deduct from the closing of your house. 

Tips and tricks for saving on closing costs 

Saving all your cash for the down payment is a home buying mistake to avoid. Closing costs are additional thousands of dollars on top of the down payment you might not have been expecting. 

But there are ways to save.

"In the seller market, we have offered to reimburse borrowers for their appraisal cost, have a network of title companies that will reduce title fees and provide grant programs for qualifying borrowers to cover down payment and some closing costs," says Steve Twyman, branch manager with Mortgage Experts "There are options for lender credits as well."

Of course, this is where having a strong credit rating will pay off, Twyman adds.

Orlando Miner, principal at Miner Capital Funding, LLC, recommends seeing if you can get the seller to pay for closing costs. "This is a common occurrence so don't feel shy about asking for this. Remember the worst that can happen is they can say 'no.'" 

But again, this will be harder to negotiate when it's a seller's market, as it is right now in many regions of the US.

Miner adds that timing is key. For example, closing at the end of the month will save you on prepaid interest. "The rule is you have to pay prepaid interest from the date you close to the end of that month. So the closer you close to the end of the month the less money you pay."

You might also want to play around with closing cost calculators. These can show you at least roughly how much you may be paying for closing costs as one lump sum.