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How Are Closing Costs Calculated?

Closing costs are fees that you pay when finalizing the purchase of a home, as well as those fees you pay if you refinance. If you're buying a home, closing is the day that the sale of your house becomes final and all of the conditions in your purchase agreement have been fulfilled.

The different fees that make up closing costs

The first step is to understand all of the fees associated with your transaction. While lenders post their rates online and in promotional materials, all of the applicable fees for your unique transaction must be disclosed. These fees typically include the origination fee (a percentage of the total loan amount) and discount points (paying points is like getting a reduced interest rate; one point equals 1 percent of the loan).

Some closing fees may be eligible to be rolled into your loan so that you don’t have to pay them upfront. There are some other fees, however, that must be paid for at closing and cannot be rolled into the mortgage. This also applies if you're refinancing a mortgage.

Estimating your closing costs

All in all, closing costs are approximately 2 to 5 percent of the home purchase. If you’re buying a home that costs $200,000, you can typically expect to spend anywhere from $4,000 to $10,000 in closing costs. Each buyer's closing costs are different, but this is an example of what you can expect to pay.

Your agent and lender should always give you an estimate of closing costs so you know what to expect. They will give you the best estimate possible, but keep in mind that it is just a ballpark figure that doesn't account for additional fees that come due at closing or ones you can roll into your loan amount.

Closing costs can also vary from state to state; legal fees, title search and insurance premiums make up the bulk of these costs. Other commonly paid items include property taxes and water bills, homeowners' association dues, and transfer taxes levied by states or counties where the home is  located. In addition, closing costs  can include prepaid costs, which will be paid out at closing. These typically include homeowners insurance and your lender may require you to pay interest for the month in which you close on your loan.

Do sellers ever pay closing costs?

Rules for closing costs will vary by state, and in some states, sellers are required to pay a portion of closing costs. Overall, it’s common for buyers to cover these expenses entirely, but it really depends on the situation. When you're making an offer on a home , consider asking the seller to pay for all of your closing costs as a way to reduce how much cash you have to come up  with for the down payment. But know that not all lenders allow this practice.

If a seller is extremely motivated, they may offer to cover some (or all) of the buyer's closing costs as a way to entice buyers to purchase their property. This practice can save you thousands, but there are rules around who gets the money and what it covers. Always ask your real estate agent for advice if you’re presented with this offer.

Final thoughts

It can be difficult to avoid closing costs when purchasing or refinancing a home, but there are some workarounds if you’re looking to save money. You may be able to finance some of these costs, or negotiate something with the seller if you’re purchasing a home. It’s always important to consider closing costs when planning for a new home purchase or refinance so that you have a realistic picture of what you can comfortably afford.