How Much Are Closing Costs When Buying a House? – Estimates
glancing through real estate listings to the moment you sign the last piece of closing paperwork, the process of buying a house typically takes months. Much needs to happen during that time: showings, making an offer, completing a loan application, appraisal, and inspection. It’s enough to overwhelm even the most organized buyer.
Buying a home isn’t cheap – and not just because your house is likely to be the largest single purchase you ever make. Closing on a home is a costly endeavor too. According to Zillow, U.S. closing costs typically range from 2% to 5% of the sale price. A Bankrate survey found that combined mortgage closing, origination, and third-party costs – which can all be lumped together under the “closing cost” umbrella – average $5,078. In the survey, Texas reports the highest mortgage closing costs, while Nevada has the lowest.
The good news is that closing costs aren’t solely determined by geography, nor completely set in stone from the moment you choose a lender. It’s possible to comparison shop for some individual components of your total closing bill, such as title insurance, and to meaningfully reduce the cost of items that you aren’t permitted to shop around for. At the same time, you’re responsible for paying some items up front at closing, before they’re technically due. These are known as “prepaids,” and they typically include escrow expenses such as private mortgage insurance, homeowners insurance (hazard insurance), and property taxes. You need to bring sufficient funds to closing to cover your prepaids.
Key Definitions and Terms
Before getting into the nitty-gritty aspects of residential real estate closing costs, some definitions are in order:
Loan Estimate: This is a plain-language document that your lender is legally required to provide you prior to closing. The loan estimate outlines all your closing items with best-guess estimates or estimated ranges for their actual costs. It also clearly indicates which items you’re permitted to shop for.
Settlement Statement: This is the official summary statement of the real estate transaction, typically presented at least one business day prior to closing. Also known as a HUD-1 statement, the settlement statement includes all closing costs, plus the purchase price, down payment amount, and broker commissions.
Paid Outside Closing: This term, usually abbreviated “P.O.C.” on the settlement statement, indicates that the buyer paid the cost sometime prior to closing. Certain costs, including the first year’s homeowners insurance premiums and home inspection fees, are frequently paid outside closing. There is some ambiguity as to whether fees paid outside closing can properly be termed “closing costs,” but this post does not distinguish between costs paid outside closing and costs paid at closing.
Earnest Money: When you put an offer in on a house, it’s customary to include an “earnest money” check to underscore your intent to actually purchase the property. Earnest money is typically a small percentage (less than 1%, often 0.5%) of the home’s list (or your offer) price. If the seller accepts the offer, the earnest money is deposited into an escrow account. If the transaction closes without incident, the earnest money is applied toward closing costs, reducing your out-of-pocket expense on closing day. If the transaction falls through, you usually – but not always – get the earnest money back.
Commissions: Broker commissions aren’t considered closing costs, even though they account for a significant chunk of the transaction value – usually 6%, split evenly between buyers’ and sellers’ agents. Commissions are taken out of the sale price before the seller receives the proceeds, so buyers aren’t ultimately responsible for paying them.