Closing Costs

Closing costs summary: 

• Closing costs on a home loan include a wide range of fees and expenses for taxes, underwriters, home appraisals, notaries, and other professional services.

• The total amount of closing costs is usually about 2% to 5% of the loan amount.

• Some lenders will let you roll the closing costs into the loan, which could help you hold onto more of your cash though you may pay more in interest. 

Closing costs definition and meaning

Closing costs are the various fees and expenses that you have to pay when closing on a mortgage or home equity loan. Closing costs typically average about 2%-5% of the loan amount, and can include various government regulatory fees, insurance costs, taxes, and more.  

Key concept: The fees and expenses you’ll pay when closing on a mortgage or home equity loan or other real estate loan.

More on closing costs

There’s often a lot of work that has to be done behind the scenes for a real estate transaction. This is done by lenders, government officials, inspectors, underwriters, and lawyers in order to complete the process of issuing a new mortgage or home equity loan. Closing costs help pay for that work.

Closing costs can add up, but they’re a necessary part of closing on a home loan. Real estate transactions are complicated, highly regulated, and require a lot of paperwork. That’s why closing costs add a bit of extra time and expense to the process. 

Key attributes of closing costs 

Here are some of the key attributes of closing costs.

One-time fees 

Closing costs are typically one-time fees and expenses. These costs are separate from your monthly mortgage payment. Closing costs are not the same as homeowners insurance, property taxes, maintenance costs, or other ongoing costs of homeownership. 

Fees are paid at closing 

If you’re buying a home, refinancing your mortgage, or getting a home equity loan or home equity line of credit, you'll be given an official closing date to finalize the transaction. Closing costs are due on this transaction date, the “closing” of your new loan.

Complex fees

Selling a home, buying a home, or accessing the value of a home with a home equity loan or home equity line of credit (HELOC) are all complex transactions. Several different people and organizations need to dot the i’s and cross the t’s on your new mortgage loan before you can get access to the money or the home. Closing costs might cover a wide range of complicated activities and professional services, like a title search, home appraisals, recording fees, and more. 

Percentage of loan amount 

The exact amount of your closing costs will depend on your state, your home’s value, and the type of loan. In general, closing costs on a home equity loan or new mortgage will be in the range of 2% to 5% of the loan amount. 

For example, if you borrow $400,000 for a new home, your closing costs might be $8,000 to $20,000. On a $50,000 home equity loan or line of credit, your closing costs might be $1,000 to $2,500. 

Pay cash or roll closing costs into the loan 

If you don’t want to fork over a few thousand dollars of cash to close on your loan, you may have an alternative. Closing costs can sometimes be rolled into your loan. 

For example, say you get a $50,000 home equity loan and need to pay 5% in closing costs. Instead of borrowing $50,000, your 5% closing costs ($2,500 cash) would be added to your loan amount for a total principal of $52,500. The downside to rolling over your closing costs is that you'll now have to make interest payments on the higher loan amount.

Types of closing costs

Different states might have different closing costs based on a few different rules, regulations, and fees. Here are the most common types of closing costs that you could expect to pay: 

• Origination fee. Lenders charge this fee for issuing or originating your loan. Origination fees typically range from 0.5% to 3.5% of the loan amount.

• Underwriting fee. This fee goes to pay for professional underwriting services. Underwriters determine your credit risk and help lenders decide which home loans to make, based on the borrower’s finances, credit history, home value, and loan amount. 

• Credit report fee. Lenders perform a hard inquiry on your credit report to check your history as part of your loan application. Credit bureaus charge them a fee that is often included in closing costs. 

• Title search fee. Lenders need to verify that the borrower has the legal right to the title of the home, and no one else is claiming ownership. This involves searching through official records and paying a fee of around $75 to $200. 

• Appraisal fee. Lenders will often want to have a home appraised to make sure it’s worth as much as the borrower thinks it is. This helps lenders avoid lending too much money for overpriced homes. Home appraisals usually cost a few hundred dollars. 

• Document prep and attorney fees. Every home loan requires a pile of paperwork that financial and legal professionals need to review. These fees could add up to more than $1,000. 

• Notary fee. Home equity loans and other home mortgage loans must be signed in the presence of a notary public, who will notarize the signed contract and make the transaction official. This fee might range from $50 to $200, depending on your location. 

Other closing costs might include a pest inspection, one-time flood insurance premiums, or a few months’ worth of property taxes paid in advance. 

If you’re concerned about closing costs, talk to your lender to understand how much you can expect to pay. You have the right to get a clear picture of a loan’s estimated total closing costs before you go through with the loan.