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What Are Closing Costs And What Do They Include?

A man sitting on a couch looking at his phoneThe cost of purchasing a home includes more than just the down payment. In addition to the down payment, you will also need to pay closing costs which include various items and costs. It is crucial that homebuyers keep these in mind when budgeting.

On average, closing costs range from 2% to 5% of the purchase price. Some lenders require a completed loan application before pinpointing a more precise estimate, while others are more transparent with their options.

The factors that determine closing costs include the loan program, down payment, credit scores, property type, and occupancy. Your specific scenario establishes what percentage your closing costs will be. Let’s take a closer look at the closing costs paid by homebuyers.

What do Closing Costs Include?

The various fees included in buying a home are combined into “closing costs,” a collective term. These fees can be from the lender and third parties involved in the transaction, such as title companies and home appraisers.

Typical Closing Costs Include:

  • Credit report acquisition fees
  • Mortgage origination fee for processing loan paperwork
  • Discount points
  • Home appraisal
  • Property survey
  • Insurance and title search
  • Escrow deposit
  • Recording fee from the city
  • Underwriting

Again, these are just general charges included in closing costs for homebuyers. Your situation might include additional costs, or some of the above fees may not apply to your situation.

Average Closing Costs

As mentioned above, the average closing costs can range between 2% and 5% of the purchase price. For example, if you’re purchasing a home that costs $500,000, your closing costs can be between $10,000 and $25,000. Because this is such a wide range, planning for these costs can be difficult. However, this is where a Loan Estimate can help.

Shortly after you fill out a mortgage loan application, you will receive a document from the lender called a Loan Estimate. This standardized document will explain lots of essential information about your loan. Your lender is required by law to provide this document to give you a reasonable estimate of how much your home purchase will be. The estimate outlines your loan amount, mortgage rate, approximate monthly payments, and an estimate of your closing costs. It also provides a detailed breakdown of the different costs associated with your loan.

Lender Credits and Discount Points

Discount points, also known as mortgage points, are fees that the borrower pays directly to the lender once a transaction closes to switch to a lower interest rate. This strategy is also referred to as “buying down the rate.” The lower your rate is, the lower your mortgage payments. One discount point is equal to 1% of the mortgage amount, or $1,000 for every $100,000.

The amount paid at closing can be affected by various factors. Consider these scenarios:

  • Borrower A might choose to pay mortgage discount points to switch to a lower interest rate.
  • Borrower B might avoid paying points to lower upfront costs.
  • Borrower C might not want to pay for discount points and take a higher rate to get a lender credit to decrease closing costs.

Each of these options has a difference of several thousand dollars in the amount these borrowers pay to close their loans. Along with a lower interest rate for purchasing discount points, borrowers can have these points tax-deducted, similar to the interest paid with each mortgage payment.

To learn more about closing costs, or how you can get pre-approved, secure a low mortgage rate, or anything related to the home loan process, you can contact our expert team of Mortgage Analysts. Our team is available 7 days a week by phone at (855) 855-4491 or by email at jvmteam@jvmlending.com.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167