Closing costs are all the expenses needed to seal the deal on your home purchase, beyond the negotiated purchase price of the property. Most buyers are surprised by how expensive closing costs can be (in many cases as large as the down payment!), so it’s critical to factor these costs when considering your savings plan and how much home you can afford.
The average closing costs fall between 2%-6% of your total loan amount. So, on a $450,000 loan, you’re looking at closing costs ranging from $9,000 to $27,000. Here at Tomo Mortgage we recommend homebuyers shopping with us to have at least 3% of the loan amount saved, (we can charge less due to not tacking on any unneeded fees).
However, as of August 17, 2024, the way agent commissions work is also changing, which could impact your total closing costs. Under the new rules, buyers may now need to pay for their own agent’s commission. Previously, sellers coverers covered the commission costs for both their agent and the buyer’s agent, but this is likely no longer the case.
So on that same $450,000 home, you might need to budget an additional $4,500 to $13,500 to cover your agent’s commission—on top of the 3% of the loan amount you should have saved for closing costs.
Why are closing costs so expensive? Here’s a breakdown of fees as they might pertain to that same $450,000 home:
| Typical Lender | Tomo Mortgage | |
| Lender Fee | $2,250-$4,500 (0.5% to 1% of the loan amount) | $0 |
| Interest Rate Points | $0, unless you choose to buy points. 1 point usually equals 1% of the loan amount. | $0, unless you choose to buy points. 1 point usually equals 1% of the loan amount. |
| Title | Around $2,250 to $4,500 (0.5% and 1.0% of the property’s purchase price). | Around $2,250 to $5,500 (0.5% and 1.0% of the property’s purchase price). |
| Appraisal | $400-$1,000 (loan type, location and property factor in) | $400-$1,000 (loan type, location and property factor in) |
| Government Recording Fees | $12-$84 (largely varies by location) | $12-$84 (largely varies by location) |
| Escrow Account Funds | $4,500-$9,000 (1%-2% of the total home cost) | $4,500-$9,000 (1%-2% of the total home cost) |
| Attorney Fees | $500 to $2,000 – you will find your own attorney, so make sure to shop around for one who’s fees fit your budget. | $500 to $2,000 – you will find your own attorney, so make sure to shop around for one who’s fees fit your budget. |
| Total Costs at Closing | $9,912-$21,784 | $7,662-$17,284 |
Some closing costs are inherently tied to purchasing a home with a mortgage. Other costs, such as origination fees, are dependent on the lender. These are known as lender controlled costs, the closing costs which your lender can change and manipulate. Tomo Mortgage, unlike other lenders, does not charge any origination fees.
How can I accurately estimate the closing costs for my home purchase?
Finding a Loan Officer you trust is crucial. They’ll help you review closing costs in the Loan Estimate (or, “LE”) to make sure you can afford the closing costs in addition to your monthly payment and down payment on your new property.
A closing costs calculator will factor in the home price, down payment, loan amount, interest rate, discount points, and location.
Depending on what state you are purchasing in, you could encounter different property tax and home insurance costs, due to location specific risks like hurricanes if you live in Houston versus Denver, or crime rates if you live in a city versus a rural area.
This closing cost calculator from Fannie Mae (a government-sponsored enterprise that is one of the largest purchasers of mortgage loans,) has a great calculator that can help you start to plan for your unique set of expenses. Check it out HERE.
What is my closing disclosure?
Your Closing Disclosure is a five-page document that gives you all the final details of your mortgage loan. It covers everything from your loan terms to your projected monthly payments and all the fees (aka closing costs), you’ll need to pay. Your lender is legally required to give you this document at least three business days before you close on the loan. This gives you time to review everything, compare it with your initial Loan Estimate, and ask any last-minute questions before signing.
The Closing Disclosure is super important because it ensures everything is transparent. You’ll see details like your loan amount, interest rate, monthly payments, closing costs, and any escrow info. This is your last chance to double-check that everything is accurate and that you’re fully aware of your financial commitments before finalizing the deal. It should be given to you several days before closing on your home loan.
What is my closing statement?
Your closing statement will likely be given to you on your closing day. It encompasses all of what goes into your loan. It’s the big picture of all the debits and credits involved in the deal, and is also referred to as HUD-1.
Should I save for closing costs separately from my down payment?
Absolutely. You’ll be covering both the down payment and closing costs, so it’s essential to know what you’re comfortable paying and make sure you have enough saved.
Do I have to factor in paying my real estate agent?
Given the changes to how Buyer’s Agents will be paid, it’s crucial to review your financial situation and adjust your savings goals accordingly. While traditionally it was recommended to have 3% of the loan amount set aside for closing costs, separate from your down payment, you may now need to consider increasing this amount to account for the buyer agent’s commission. This will depend on your specific situation and the terms you negotiate with your agent.
What is the difference between prepaid costs and other closing costs, and how do they affect my savings plan?
Prepaid costs are expenses paid in advance, such as property taxes and homeowner’s insurance, which are frequently set aside in an escrow account.
Other closing costs are fees associated with obtaining the mortgage and transferring property ownership. Some of these costs such as origination fees can be negotiated or avoided entirely, while others like a title recording fee generally are hard to avoid.
Do I have to close on my home in person?
Not always. You can do a remote closing in some states, using Remote Online Notarization, by video calls, where a notary can authenticate signatures remotely.
What if I can’t afford closing costs?
One thing you can for sure incorporate into your home buying plan if you can’t or anticipate struggling with paying closing costs, is to make sure you do not get stuck with any origination fees.
Another trick is to time your closing at the end of the month. Then your closing costs will reduce your prepaid interest cost. When you close on a home, you prepay interest for the period between your closing date and the end of that month.
If you close earlier in the month, you’ll have to pay interest for more days, which increases your upfront costs. By closing towards the end of the month, there are fewer days left in the month, so the amount of prepaid interest you owe is smaller, reducing your overall closing costs.
Lastly, if you are buying in a buyer’s market, meaning there is a ton of housing inventory, with less demand from buyers, you might be able to negotiate with the seller of the home to pay for all or part of the closing costs, especially if their home has been listed on the market for a while, including your real estate agent’s commission.
If you try on all of these solutions, and still feel like affordability is an issue, saving for a couple more months to feel confident about your financial footing could be a good call.
Conclusion
When shopping around for lenders it is important to consider what lender controlled costs/ or lender fees are being charged that will end up getting tacked on to your bill at the time of closing. We recommend having at least 3% of the loan amount saved for your closing costs.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
