Get estimated closing costs when you are buying or selling a home

Estimated closing costs vary widely depending on your country. We give you a rough idea of what you can expect in this article

Get estimated closing costs when you are buying or selling a home

Despite what the term may suggest, closing costs are anything but an afterthought. Often, you will end up paying thousands of dollars in closing costs in property-related fees, mortgage-related fees, and additional fees.

But don’t worry. If you do your due diligence during the pre-approval process of your home loan, there should be no significant price jumps or surprises.

Here is everything you need to know about estimated closing costs, including how to calculate closing costs, who pays at closing, and how to reduce closing costs. For our usual readers of mortgage professionals, this is part of our client's education series, and we encourage you to pass this along to your clients who have questions about their estimated closing costs.

What is a good formula for estimated closing costs?

These costs are essentially fees that mortgage professionals, such as lenders and real estate attorneys (among others), charge to finalize your home loan and the real estate transaction. Typically, closing costs range from 3% to 6% of your loan amount.

For instance, if you purchase a property for $300,000, your estimated closing costs could be anywhere from $9,000 to $18,000. Of course, your closing fee will vary based on your mortgage lender, loan type, and the jurisdiction you live in.

However, the basic formula that you can use to get an estimated closing cost is:

Home price ($300,000) x Loan amount percentage (0.03-0.06) = Closing costs ($9,000-$18,000)

In 2021, single-family homes in the United States had an average closing cost of $6,905, according to Bankrate. The most expensive closing cost in the U.S. last year was in Washington, D.C., where the average closing cost for a home was $29,888. Missouri, meanwhile, had the lowest closing cost in the U.S. in 2021, with a $2,061 average.

Here is a breakdown of the estimated closing costs of three different countries:

A comparison of the estimated closing costs for three countries

What are closing costs?

These costs usually pay for the professionals who help you to finalize the complex process of your mortgage application and real estate sale. As the term implies, you pay your closing costs at closing. There are property-related fees, mortgage-related fees, and additional fees.

Here is a breakdown at some of the fees included in closing costs:

Property-related fees

Property-related fees are the costs associated with the home and the expenses that verify the home’s value and ownership. Since your property is the collateral for the mortgage, this is critical.

Some common property-related fees that are included in estimated closing costs include:

  1. Appraisal fee
  2. Home inspection fee
  3. Title search
  4. Title insurance
  5. Property tax

Let’s take a closer look at each:

1: Appraisal fee. This will cover the licensed professional’s work in determining the worth of the property. You can expect to pay a higher appraisal fee for a larger home compared to a single-family home. You usually pay this fee well before closing day, however it is still considered a closing cost.

2: Home inspection fee. This fee, which usually costs a few hundred dollars, is separate from your appraisal fee and pays to the home inspector who evaluates the condition of your property. Technically, this home inspection is optional, although it is a good idea to know if there are any issues with your home.

3: Title search. Lenders often have a title company search property records to make sure there are no issues with the title of the property, like a tax lien. This is the case unless you are buying your home brand new.

4: Title insurance. Most lenders require that you get title insurance in case there are problems with ownership post sale. An added protection for lenders, title insurance usually costs between 0.5% and 1% of the amount you are borrowing. If you want to pay more, you can buy your own title insurance policy to protect your financial interest in the property.

5: Property taxes. At closing, you may also be required to pay for six months to one year’s worth of property taxes, which varies depending on the jurisdiction you are located in.

Mortgage-related fees

Mortgage-related fees are costs that are associated with creating the mortgage, and can include, among others, fees from your lender.

Here is a look at some common mortgage-related fees that come with closing costs:

  • Credit report fee: You pay this fee to your lender to check your credit score and credit report.
  • Origination fee: This is a fee that lenders charge for the creation of the loan. Origination fees usually equal between 0.5% and 1% of the loan and is basically how lenders earn money.
  • Application fee: To process your loan application, a lender may charge a fee of several hundred dollars known as the application fee.
  • Underwriting fee: This fee is also known as a processing fee or an administrative fee, which pays for the evaluation and verification of your financial eligibility and qualification.
  • Points: You can pay an added charge known as discount points or mortgage points to lower the interest rate on your mortgage. For a lower rate, most lenders will let you pay points, which will make a significant impact on the amount of interest you will pay over the life of your loan. Be warned, however, that it will raise your closing costs.

Additional closing cost fees to estimate

Beyond paying property-related fees and mortgage-related fees, you may have to pay additional fees at closing. These might include an attorney’s fee, for instance. You may also have to pay additional fees and/or taxes depending on the jurisdiction the home is located in. It is important to know beforehand where these additional fees may come from and how much they may cost you.

Who pays at closing, buyer or seller?

Generally, both buyers and sellers pay closing costs. The price breakdown of payments will depend on what both parties negotiated beforehand. Typically, however, the breakdown of the closing costs between buyers and sellers looks like this:

Buyers’ closing costs

While estimated closing costs for buyers can vary, they typically include:

  • Loan fees
  • Credit report fees
  • Title search
  • Lender’s title insurance
  • Homeowners insurance
  • Inspections
  • Appraisals
  • Surveys
  • Settlements
  • Attorney fees

Sellers’ closing costs

Closing costs for sellers also varies, and is dependent on negotiations beforehand, but usually include:

  • Real estate agent’s commission
  • Buyer’s title insurance
  • Mortgage pre-payment penalties
  • Outstanding debts on the property
  • Their own attorney fees
  • Transfer taxes
  • Recording fees

It is entirely possible, however, that a seller agrees to pay for some if not all of the closing costs, as determined by the negotiation. Generally, sellers will do this to incentivize buyers to buy slow-moving properties or if the seller is motivated to sell fast.

If you are purchasing a property, you may ask the seller to pay closing costs instead of lowering the sales price. If you agree to a fast close and make fewer demands for changes to the home or repairs, sellers will likely be especially motivated to accept this offer.

How soon after closing do I get keys?

The short answer is that you will get the keys to your new home immediately after closing. In other words, homeownership becomes official on closing day. The good—and exciting—news is that closing day typically only takes a few hours, meaning that if you have everything wrapped up before 3 p.m. and it is not a Friday, you will get your new keys that same day.

Remember: It is crucial to get the bulk of your administration finished on closing day, which includes transferring your down payment to your lawyer. Several days before closing day you should have transferred your down payment funds, including your RRSP, which can take time. Appraisal and inspection fees, for instance, also have to be paid in advance of closing day.

A quick checklist on closing day usually includes:

  • Your lender providing the mortgage funds to your notary/lawyer
  • Providing your down payment, less the deposit, to your notary/lawyer, along with other closing costs
  • Your notary/lawyer paying the previous owner, registering the home in your name, and providing the deed—and the keys—to your new home.
  • You celebrate

Get estimated closing costs and you will be moving in in no time

How do you reduce closing costs?

Closing costs can feel overwhelming, especially after you have paid for a (likely significant) down payment, moving expenses, and home repairs. There are some ways, however, for you to reduce your closing costs, which include:

  1. Shopping around
  2. Scheduling the closing for the end of the month
  3. Appealing to the seller for aid
  4. Comparing loan estimates/closing disclosure forms
  5. Including closing costs in your mortgage

Let’s take a closer look at each to give you a better idea how they may help:

1. Shopping around

Getting a variety of estimated closing costs between lenders and third-party services—like homeowners' insurance and title companies—may save you significant money. Keep in mind as well that you are not obligated to use the title company or homeowners' insurance agent suggested by your lender.

Shopping around can also help you find competitive terms and rates, especially regarding the following:

  • Underwriting fees
  • Application fees
  • Broker rebates
  • Loan processing fees
  • Rate lock fees

2. Scheduling the closing for the end of the month

If you want to limit pre-paid daily interest charges, you can schedule your closing date closer to the end of the month. That way, since you incur debt more slowly, you will incur less interest expense. If you want to determine how much you stand to save, you can have a lender run this scenario for you.

3. Appealing to the seller for aid

By negotiating, you may be able to convince the seller to cover some of the estimated closing costs or lower the purchase price. If the seller is motivated and the home has been on the market for some time, appealing to the seller to lower the closing costs may be more likely.

4. Comparing loan estimates/closing disclosure forms

It is important to closely review your initial loan estimate, requesting the lender clarify fees or charges that you are unsure. Red flags should appear when lenders either cannot explain a fee or push back when asked. You can also request that your lender walk you through details if you see fees or increases in closing costs. While fluctuations in closing costs are common, significant increases or surprise additions may affect your ability to close.

5. Including closing costs in your mortgage

Some lenders may offer to include your closing costs into your home loan or offer to pay them. This does not mean you can avoid the costs entirely, since lenders usually charge higher interest rates to cover the costs of including closing costs in your mortgage. This should be a last resort because you may ultimately wind-up paying interest on those closing costs and higher interest on your mortgage.

Estimated closing costs will give you a clearer picture of your finances

What not to do after closing on a house

There are a few things it would be a good idea not to do after closing on a house. One is that you should avoid changing jobs, at least until after you have finished the mortgage application process and closed on the home loan. Otherwise, switching jobs prior to closing might impact your loan approval process. If you do switch jobs, you could delay your closing. In the worst-case scenario, you might fail to qualify for the loan.

Here is a quick look of what else you should avoid after closing on a house:

  • Do not purchase or lease a new vehicle
  • Do not sign up for deferred loans
  • Do not, as mentioned, switch jobs
  • Do not forget to remind your lender of an influx of cash
  • Do not run up credit card debt
  • Do not open new credit card accounts

While the number of fees that come with closing costs may seem overwhelming, a good mortgage professional will help you to navigate the process. It may sound like a complex process, but you can get your estimated closing costs ahead of time and perhaps even negotiate to reduce them—so don’t worry. You will be picking up the keys to your new home in no time.

How accurate were your estimated closing costs for your home? Let us know in the comments section below.