A Homebuyer’s Guide to How Closing Costs Are Determined

Closing is the final step before getting the keys to your new house and starting your life there. With it comes your last payments in the home buying process — closing costs. But how are closing costs determined, exactly? The amount you pay is determined by a variety of factors, many of which can vary from state to state. Take a look at our guide to help you navigate the final step in your real estate transaction with ease! 

What Are Closing Costs?

Closing is when the property’s title is transferred from the seller to the buyer, and closing costs are the associated fees and expenses paid at the end of a real estate transaction. These fees will vary based on where you live, the property you buy and the type of loan you choose. 

Three days before your scheduled closing, you should receive a closing disclosure outlining the final details about your loan and closing costs. There are three sections, or types, of fees buyers must pay at the time of closing: 

Lender Fees

This includes items like courier fees, appraisal fees, processing fees, underwriting fees and more. It is not uncommon, though, for some lenders to wrap all these additional expenses into an origination fee.

Title Fees

Title fees are comprised of title search fees, lender’s title insurance and owner’s title insurance. A title search is important for two main reasons. First, it ensures the seller owns the house. It will also check to make sure there are no liens against the property.

Prepaid Expenses

Lenders often require borrowers to create an escrow or impound account to collect homeowners insurance and property taxes.

One optional closing cost you may encounter is a discount point. This is a type of prepaid interest mortgage borrowers can purchase to lower their interest rates. Each discount point typically costs 1% of the total loan amount and can reduce the loan’s interest rate by one-eighth to one-quarter of a percent. 

How Much Are Closing Costs?

Homebuyers will typically pay between 2-5% of the purchase price of their home in closing fees. If your home costs $150,000, for example, you may pay between $3,000 and $7,500 in closing costs. While some fees—like property taxes — cannot be changed, there are a few ways to lower your out-of-pocket expenses at closing. The two most common avenues for closing costs are lender-paid and seller-paid costs. 

Seller-paid closing costs may involve the buyer asking the seller to reallocate any available incentives for a credit to cover closing costs, which in exchange, may increase the purchase price.

Buyers can also request lender-paid closing costs. This means the lender will pay the closing costs and charge a higher interest rate to recover the money. You can even negotiate some closing costs; however, most are hard fees — like appraisal fees — that cannot be changed. 

Closing on a home is an exciting process for most buyers because it signals you are one step closer to homeownership. Understanding how closing costs are determined can help alleviate stress during the home buying process by ensuring you are prepared to navigate from start to finish! Are you ready to find your dream home? Explore Perry Homes’ move-in ready properties to start your home search!