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When people are looking to buy a home, they may be thinking about how much they’ll need to save for a down payment or what monthly mortgage payment they can afford. But there’s another expense prospective homeowners should consider before taking out a mortgage: closing costs.

What Are Closing Costs?

When you take out a mortgage, there are fees that you’re going to pay to various service providers besides just the mortgage company. These fees can be broken out into nonrecurring and recurring costs. Nonrecurring closing costs are the one-time fees you pay when you secure a mortgage for a home. These include the lender origination fee, appraisal fee, title fee, notary fee, document prep fee — essentially every fee paid just one time in conjunction with completing the transaction. Recurring closing costs include interest, insurance and taxes, which are normal costs associated with owning real estate.

Total closing costs include all recurring and nonrecurring closing costs; real closing costs are the nonrecurring closing costs that you pay one time to take out a mortgage — essentially the costs associated with borrowing money.

How Much Can I Expect to Pay to Close When Buying a Home?

The following scenarios assume you have taken a no-points loan. (Points are upfront overhead you can pay to purchase a lower rate of interest and subsequently a lower monthly payment.) Closing costs generally run between 3% and 5% of your purchase price but can vary depending on location and other factors. Here are rough estimates of the closing costs you can expect to pay by purchase price, assuming they fall on the higher end of that spectrum, based off of my experience as a mortgage professional:

  • Purchase price $200K-$300K: closing costs $7K-8K
  • Purchase price $300K-$400K: closing costs $9K-10K
  • Purchase price $400K-$500K: closing costs $10K-$11K
  • Purchase price $500K-$600K: closing costs $11K-$12K
  • Purchase price $600K-$700K: closing costs $12K-$13K
  • Purchase price $700K-$800K: closing costs $13K-$14K
  • Purchase price $800K-$1 million: closing costs $15K-$16K

All of these scenarios account for setting up an impound account for property taxes and insurance and are reflective of total closing costs including both recurring and non-recurring closing costs.

How Much Can I Expect to Pay to Close When Refinancing?

Refinancing contains lower fees and only one form of title insurance is needed: a lender’s policy. My estimates of the closing costs for no-points refinancing by loan amount are:

  • Loan amount $100K-$400K: closing costs in the $3K range
  • Loan amounts $400K-$600K: closing costs in the $3,500 range
  • Loan amounts $600K-$1 million: closing costs in the $4K range

Note: These refinance figures are reflective of real closing costs only; they don’t account for any prepaid taxes or insurance.

Keep in mind, these scenarios are meant to simply provide a baseline for you. The bottom line: If you’re planning to purchase a home or refinance one you already own, be prepared for the fees. Closing costs can be financed, paid for in cash or come in the form of a gift. Additionally, these can come in the form of the seller credit when buying a home.

Remember, too, a good credit score can help make your home loan more affordable since it generally qualifies you for the best terms and conditions on a mortgage. You can see where your credit currently stands by viewing two of your scores for free, updated every 14 days, on Credit.com.

Image: michaeljung

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