Closing Costs

Biggest Shock for First-time Homebuyers: Closing Costs

Apr 25 2022

You know it’s important to save a down payment, even a modest one. But are you planning for the thousands of dollars you’ll pay in closing costs too? Yes, thousands of dollars. Sorry to break it to you.

The only good news is that we’re about to help you work up a ballpark estimate of your closing costs in just six steps. That way, you can be sure to save what you’ll need.

Estimating is tough because closing costs are complex and highly variable. The rule of thumb says you’ll pay 2 to 5 percent of the price of your home. But that’s a big range: $4,000 to $10,000 on a $200,000 home. How much will your closing costs be? And what exactly are you paying for?

We find that most online calculators are either too simple to be accurate or ask for too many obscure figures. Our more individualized approach will help you get closer to reality than most. It’s based on your price range and where you intend to buy, and it uses key closing costs you can find right now — we’ll show you where. And along the way, we’ll explain the what and the why.

Plan to spend maybe a half hour on working up your estimate.


Step 1: Loan processing and settlement fees

Find the average cost in your state on this Bankrate chart and note the figure. This chart limits itself to the most common lender and third-party fees, so it’s useful for almost any buyer. We’ll help you track down the more variable costs below.

Your lender’s own fees, known as origination fees, cover the work it takes to create your mortgage loan. While these fees do vary (one reason to shop around for your loan), they don’t vary as much as other costs.

Lenders also pass on fees for outside services needed to process and close on your loan. Here are the most common ones, but you might pay others:

  • Attorney, closing, or settlement fees (one of your biggest closing expenses)
  • Appraisal
  • Credit report
  • Flood determination
  • Flood monitoring fee
  • Tax monitoring fee
  • Tax status research fee
  • Pest inspection
  • Survey fee
  • Courier fees


Step 2: Title insurance

Estimate your one-time cost with this rate calculator and note the figure. Be sure to choose “buying” as the transaction type. This is the simplest way to get this figure online that we’ve seen so far (we have no other opinions about the company), but you do have to give up your email address.

The price tag for title insurance depends on where you live, plus the size of your loan. So while the average for this one-time cost is $1,000 for each policy (one for the lender, one for you), it can be as little as a couple hundred to as much as $4,000.

In most states, the buyer pays for the lender’s title insurance policy. Whether buyer or seller pays for the buyer’s policy is a local convention and potentially negotiable. The rate calculator we’ve linked you to above assumes you’re buying both, and from the same company — which usually gets you a good discount.

BTW, you’re not required to buy your own title insurance policy, but as a general rule, it’s a smart idea. It covers a thorough search for problems that could affect the deed to the property — unpaid debts, heirs that pop up out of nowhere, pending legal actions, and other problems. And it covers you against loss if your ownership of the property is ever questioned.


Step 3: Home inspection and radon testing

Add $500 for a standard inspection plus radon testing. Inspection and testing isn’t normally part of the closing process, per se (you pay directly, before closing). But it is a must-do that you need to anticipate, so we’re lumping it in.

According to Home Advisor, the national average for a standard home inspection is about $325 for an average-size home (1,000 to 2,000 square feet). The low end is about $200, the high end about $480. If you expect to buy a large house, use the high figure. Radon testing averages around $150.

What’s radon? This naturally occurring, carcinogenic gas is a big health risk if it builds up in your house, and a standard inspection doesn’t test for it. High levels are far more common in certain geographical areas, but even low-risk areas can have hot spots.

Wild card: Most specialized inspections and tests aren’t covered by a standard home inspection. But it’s hard to predict which ones you’ll need. For example, homes built before 1982 or so might have lead paint, and the seller won’t necessarily know about it. Are your target neighborhoods full of older homes, and do you have or plan to have kids? Lead is never a good thing, but it affects kids more. Testing costs roughly $300.


Step 4: Transfer taxes

Estimate transfer taxes with this state-by-state chart and note the figure. All but a dozen or so states, plus some counties and cities, impose a tax on real estate sales.

This transfer tax is also known as a “deed tax,” “conveyance tax,” “mortgage registry tax,” or “stamp tax,” among other names. It’s amazingly varied in terms of amount, exemptions, whether buyer or seller pays …  As you’ll see in the chart, some states’ tax structures are especially complicated. Confused? Try going to your state website and contacting the tax authority.

These examples show why it’s smart to estimate this expense long before you close:

  • Arizona: $2 flat fee
  • Wisconsin: 0.3 percent ($600 on a $200,000 home)
  • Connecticut: Typically 0.75 percent ($1,500 on a $200,000 home)
  • Washington state: 1.28 percent ($2,560 on a $200,000 home), plus a local tax in some cases


Step 5: Initial escrow payment

At closing, your lender will set up a long-term account for you called an escrow account. Each month, part of your mortgage payment goes into it for property taxes, mortgage insurance if you need it, and often homeowners insurance. Lenders typically require that you prepay two months’ worth of each.

A) Estimate your prepaid property taxes by poking around Zillow. Note the figure. Property taxes cost thousands of dollars a year. The easiest way to get a sense of what you might pay is to check out a few homes in your target neighborhoods and price range. Scroll down to each listing’s Price/Tax History for the annual property tax bill. Settle on a figure (we suggest the higher one) and then calculate two months’ worth.

B) Estimate your prepaid mortgage insurance and note the figure. If, like most people, your down payment is less than 20 percent, you’ll pay mortgage insurance until you have 20 percent equity in your home. A good credit score will get you a better deal. It’s yet another way that your credit score affects your mortgage.

Do you think you’ll get a conventional loan or a low-down-payment FHA loan? More than half of first-time homebuyers get FHA loans. While an FHA loan helps you get into a home with a low down payment, the tradeoff is high closing costs.

Here’s how to estimate your prepaid mortgage insurance, based on the type of loan:

  • Conventional loans require private mortgage insurance (PMI). The cost varies, but plan on 0.5 percent to 1 percent of the loan amount each year.

To estimate, multiply your expected loan amount by .0005 (we’re assuming your credit score is good) to get the annual premium. Then calculate two months’ worth.

Example: For a $200,000 loan, PMI charged at 0.5 percent is $1,000 a year, or about $83 a month = $166 for two months.

  • FHA loans require mortgage insurance premium (MIP). It has two parts: an upfront charge of 1.75 percent of the base loan amount, plus an annual premium that’s 0.85 percent of the loan.

To estimate, first multiply your expected loan amount by 0.0175. Then multiply the loan amount by 0.0085 to get the annual premium and calculate two months’ worth. Add the two results.

Example: For a $200,000 loan, MIP’s 1.75 percent upfront charge = $3,500. The annual premium is $1,700, or about $142 per month = $284 for two months. Add $3,500 and $284 for a grand total of nearly $3,800. (Not surprisingly, FHA homebuyers often roll MIP into their loan.)

C) Estimate your prepaid homeowners insurance at ValuePenguin and note the figure. An annual premium averages about $1,100, with a range of $600 to $2,000 or more. Find the average for your state and calculate two months’ worth.

  • If you expect to buy a larger or more high-end house, or if you have a lot of valuable belongings, definitely round up.
  • If you’re buying a condo, your premium should be lower, because monthly condo fees usually cover insurance for the exterior and common areas.
  • Some lenders require that you pay the annual premium in full before closing, so you might want to prepare for that.

Step 6: Add it all up

No closing-cost calculator or formula can be exact. In fact, you won’t know the exact amount until you get your official Closing Disclosure, just days before you close on your home. But the sum of the five figures you’ve just tracked down will give you a pretty realistic target for your closing cost fund:

1. Loan processing and settlement fees +

2. Title insurance +

3. Home inspection and radon testing +

4. Transfer taxes +

5. Initial escrow payment

A) Prepaid homeowners insurance +
B) Prepaid property taxes +
C) Prepaid PMI or MIP +
= Your target closing cost fund

If anything, your true closing costs might be somewhat higher, so we urge you to round everything up. If you luck out and they’re lower, you’ll have some extra cash for your down payment or your emergency fund. Or your housewarming party!


Buying a condo or an HOA property?

When it comes to closing costs, it’s especially hard to generalize about properties governed by community associations. That includes condos, typically governed by condo associations (CAs) or homeowners associations (HOAs), but also growing numbers of single-family homes that are part of developments governed by HOAs.

The practices and needs of these associations vary, and so do state laws governing them, but as a heads-up, we can tell you that three types of fees might apply at closing:

Upfront dues. Community associations often ask for one to three months of the regular dues/fees you’ll be paying as a resident. Monthly fees are often $200 to $400 but can be much higher in upscale communities. To get a sense of what you might pay, browse listings that interest you — the fees are usually disclosed.

Transfer fee. Some associations charge a fee for administrative costs related to the sale. For example, they might have to generate state-mandated disclosure reports (that’s a good thing). About $100 to $400 is typical, but it can go higher.

Capital contribution. Also called a capitalization fee, this one-time charge funds future maintenance. Very few associations ask for this, so you probably don’t have to worry about it. But among those that do, it could be a couple months’ worth of the regular dues/fees.


Is there any way to reduce your closing costs?

Yes! It takes some extra legwork, but it could be well worth it. Check out our top tips for saving on closing costs.


Ready to take the next step in your homebuying journey with all the confidence of a smart and savvy homebuyer? Our comprehensive online homebuyer course is simple and easy to access on your computer, tablet, and mobile device. It’s all the information you need, all in one place. Go ahead and get started today.

Recent Posts