Closing costs - a part of the buying process that doesn’t seem to get enough of the spotlight. Sure, everyone seems to know that you need to save money for the down payment, but closing costs never seem to have the same amount of conversation. Of course, the down payment is typically the largest of the expenses you’ll have to pay out-of-pocket during the buying process, but closing costs are not insignificant. 

According to a survey done by Rocket Mortgage, 41.4% of homebuyers were surprised by their closing costs. With that said, today we wanted to take some time to review what on earth closing costs are and what you’ll need to budget for as you approach the closing table. 

What Are Closing Costs?

What exactly are closing costs? The ambiguity behind what’s involved in these costs is a big part of why many don’t even know they exist. According to U.S. News and World Report, “Closing costs encompass a variety of expenses above your property’s purchase price. They include things like lender fees, title insurance, government processing fees, upfront tax payments, and homeowners insurance.” To summarize, they are a collection of fees and payments made to a variety of individuals and organizations who are involved with your transaction. 

According to Freddie Mac, closing costs typically include:

  • Government recording costs
  • Appraisal fees
  • Credit report fees
  • Lender origination fees
  • Title service fees
  • Tax service fees
  • Survey fees
  • Attorney fees
  • Underwriting fees

How Much Are Closing Costs?

Freddie Mac states that generally, closing costs range between 2% and 5% while Rocket Mortgage says that the costs can make up about 3% to 6% of the price of the home. Therefore, for a mortgage of about $200,000, you can expect to pay between $4,000 - $12,000 in closing costs. 

Rocket Mortgage also indicated that the average closing costs (including tax) in MA came out to $7,035.04 while NH totaled $8,039.46.

So, who typically pays the closing costs? Both buyers and sellers pay closing costs, however, the buyer typically pays most of them. There is always an option to negotiate with the seller to help cover the closing costs, which can be extremely helpful if you’re not sure of how you’ll come up with the money to close. However, keep in mind that there are limits on the amount that the sellers can offer towards closing. Additionally, in a competitive market, asking for seller concessions will weaken your offer, so it’s important to discuss the pros and cons of this option with your trusted real estate agent. 

How To Prepare 

Now that we’ve discussed what closing costs are and how much they generally cost, it’s time to focus on how to prepare so that you’re ready and confident when you arrive at the closing table. Freddie Mac tells homebuyers, “As you start your homebuying journey, take the time to get a sense of all costs involved- from your down payment to closing costs.”

The best way to get ahead is to have a conversation with your real estate agent and lender right as you begin the home search. The sooner you can get an estimate of the costs directly from the experts that you’re working with to purchase a home, the better prepared you’ll be. 

Ultimately, you’ll receive a closing disclosure at least 3 business days before your scheduled closing meeting where all of the costs will be outlined and there will be a final amount of how much you owe. However, to ensure that you aren’t scrambling during those three days to get the required funds, have those conversations early so that you can focus on the best part of the closing day - getting those keys to your new home! 

Bottom Line

If you’re in the market to purchase a home, your down payment is probably the top cost on your mind. While it certainly deserves to be as its the largest cost of home buying, it's also critical to have an understanding of all the other expenses that are involved in the buying process. Closing costs can sneak up on you if you’re not anticipating them, and they are certainly not something that you want to be worried about just days before closing. By taking the time to understand what’s involved in these costs and having those important conversations early, you’ll be fully prepared as you enter the last segment of your homebuying journey.