Understanding Closing Costs: A Comprehensive Guide

Mortgages aren’t the only expensive part of buying a home — closing costs can add tens of thousands of dollars to your purchase. These costs can seem confusing since they’re a mixed bag of seemingly unrelated fees, and we’re here to clear them up for you. This way, you can more easily budget for these costs as you finalize your mortgage. If you’re asking yourself, “How much are closing costs?” we’re here to demystify the question with this guide.

What are closing costs?

Closing costs are what you pay to cover the cost of applying for and obtaining a mortgage. They comprise fees including — but certainly not limited to — appraisal fees, title insurance, and loan origination fees. Average closing costs for the buyer often range from 2% to 6% of your loan amount, with sellers having smaller closing fees.

Which factors influence closing costs?

Closing costs vary depending on your location — in some states, one region’s legislation may require sellers to cover a cost that buyers cover elsewhere. That said, this isn’t the case in Texas, where the buyer-seller split is pretty universal. If anything, Texas legislation on this front benefits buyers — our state doesn’t levy the transfer taxes that are part of closing costs in other states. Plus, down here in the Lone Star State, owner’s title insurance is just a recommendation, not a requirement.

Your credit score, loan type, and whether you take out a mortgage or pay in cash can also affect your closing costs. Additionally, if you refinance your mortgage, the closing costs for that are usually a good deal less expensive than with the initial mortgage. Either way, you typically have some wiggle room to try negotiating lower closing costs with your lender.

You can also lower your closing costs through seller concessions, which are fees sellers pay that buyers normally cover. You can negotiate these with your seller, but there are legal maximums. Namely, if you’re buying a primary residence, seller concessions can be at most:

• 9% if your down payment is at least 25% of your mortgage
• 6% if your down payment is at least 10% and under 25% of your mortgage
• 3% if your down payment is under 10% of your mortgage

These maximums apply when you’re buying a second home too, with one exception. There’s no maximum on seller concessions for a down payment under 10% of your mortgage. And if you’re buying an investment property, the cap on seller concessions is 2% no matter your down payment.

What are the primary types of closing costs?

The below list of closing costs might look big, but every fee in here is pretty simple. We’ll guide you through understanding all of this and show you that, once you know your stuff, closing costs are nothing to fear. And though this list isn’t exhaustive, it does include the fees that are almost guaranteed to be part of your closing costs.

• Appraisal fee. Lenders require an appraisal before loan closure to determine the price of the home — this is a great way for them to minimize their risk. You’ll need to cover the fee for this appraisal, which is less expensive for single-family homes than multi-family homes.
• Title insurance. Owner’s title insurance, though not required in Texas, removes your legal liability in lawsuits over title disputes. Lender’s title insurance, also known as a lender’s policy, does the same for your lender. This type of insurance is common in Texas, and its premiums might be part of your closing costs.
• Pest inspection. Termites and other wood-destroying pests can do a real number on a home. A pest inspection may thus be part of your closing costs.
• Application fee. This is what you pay to apply for a mortgage in the first place. It can be as much as $500, though in some cases, that $500 goes toward your other closing costs too.
• Attorney fees. In Texas, unlike in some other states, it’s optional to hire an attorney to represent you in a home sale. If you do hire an attorney, their fees will be part of your closing costs.
• Flood determination fees. You may need to pay a company to determine whether your home is in a flood zone. The result may have ramifications for your homeowners insurance policy. The fee you pay for your flood assessment becomes part of your closing costs.
• Discount points. Some lenders offer programs through which you can buy “points” during the closing process to lower your interest rate. These optional one-time payments are part of your closing costs.
• Loan origination fee. Typically, lenders charge 1% of your loan amount to cover the processing and underwriting of your loan. “Underwriting” is the term for drawing up your paperwork and determining whether the bank should approve you for a mortgage.
• Insurance fees. Some lenders may require you to pay a year’s worth of homeowners insurance premiums at the time of closing. Others might require you to pay one month or a full year’s worth of private mortgage insurance premiums. These are folded into your closing costs, though you don’t pay private mortgage insurance (PMI) at all with a down payment of at least 20%.
• Property taxes. Just as with insurance, your lender may require a year’s worth of property taxes when you close your mortgage deal. Sometimes, though, buyers and sellers split this, and we encourage you to look into this — it’s less money out of your pocket!
• Credit report fees. Lenders review your credit history when deciding what loan terms to offer you and whether to approve you in the first place. You’ll sometimes be responsible for the fees that come with your lender pulling your credit history. It’s rare to pay more than $100 for this.
• Home inspection fees. Not all lenders require home inspections as part of closing (though we recommend it about as strongly as possible!). Lenders that do require this may include the fees in your closing costs. Otherwise, if you pay for a home inspection before closing, you do so separately from closing costs.

Estimating closing costs

Whew — that’s a lot of closing costs to consider! This means that, in theory, there’s lots of math involved in figuring out your estimated closing costs. In reality, though, there are two very simple ways to estimate your closing costs. The first is to just multiply your loan amount by 2% and, separately, 6%. These numbers are, respectively, your likely minimum and maximum closing costs. Simple, right?

Well, the other way to estimate your closing costs is even easier: Just use a closing costs calculator. Enter the highest home price you can afford, your likely down payment amount, and your presumed interest rate. You’ll then see your total closing costs and what percentage of your loan amount this represents. Some calculators will also show you what portion of your closing costs are negotiable and fixed while detailing your cost per closing fee.

One drawback with closing calculators is that they don’t always account for legislation specific to Texas. Sure, compared to other states, there isn’t a ton of Texas legislation when it comes to mortgages. But we still recommend visiting your nearest UBank branch and speaking with one of our bankers — we’re experts in mortgages and closing costs. We’d be thrilled to walk you through your potential closing costs and walk you through this complicated process.

Quick extra tips to minimize closing costs

No two lenders charge quite the same fees or impose quite the same requirements. When you compare several lenders’ fees and requirements side by side, you can figure out which mortgage offers entail the lowest closing costs. Your decision should be much easier from there! Seller concessions can also save you lots of money on closing costs. So can negotiating lower rates on homeowners insurance — there’s nothing wrong with telling one insurer that you’re finding better rates elsewhere. The insurer might drop their rates lower than the numbers you give to secure you as a customer. This is a surefire way to bring your closing costs down.

Close the door on high closing costs

With the right lender, your closing costs can be a walk in the park to understand and cover. Here at UBank, we pride ourselves on always getting you the best financial solutions possible, including loans with low fees. On top of that, we’re eager to show you where you can save on closing costs. Visit your nearest UBank branch to get the ball rolling — and the keys in your hands.