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What Is the Formula for Calculating Closing Costs?

Sarah Edwards | October 02, 2023

Sarah Edwards
Legal Expert
Sarah Edwards, BS

Sarah Harris is a professional researcher and writer specializing in legal content. An Emerson College alumna, she holds a Bachelor of Science in Communication from the prestigious Boston institution.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: The formula for calculating closings costs typically involves paying 3% – 6% of your total mortgage loan amount. Buying a house is a major milestone. However, expenses can quickly add up, and you could end up with surprisingly high closing costs. If you find yourself struggling to stay on top of your debts, SoloSuit can help you respond to debt collectors and stand up for your rights.

Whether you’re buying your first home or moving from one house to another, you can expect to spend some money. Aside from a down payment, you’ll probably be responsible for closing costs. Closing costs can deplete your savings when you need them the most, so it’s crucial to estimate what you’ll owe and plan accordingly.

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What you need to know about closing costs

Buying a house is exciting. Once you own your property, you can decorate it how you like, make fun renovations, and feel the true thrill that is homeownership.

However, homebuying isn’t as simple as qualifying for a mortgage and saving enough for a down payment. You’ll also have to save enough to cover closing costs.

Closing costs include a variety of expenses incurred when buying a house — and some are surprisingly high. The most common fees include:

  • Application fee
  • Appraisal fee
  • Attorney fees
  • Escrow
  • Loan origination
  • Title insurance

You can also expect to pay hundreds of dollars for a home inspection, along with hundreds more in moving fees, appliances, and decor for your new home.

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You can estimate the closing costs for your property

Calculating the total amount you’ll owe at closing isn’t straightforward. Closing costs vary according to the final price of your home, your down payment amount, the location of the property, and your lender’s requirements.

According to Zillow, buyers typically pay between 2% and 5% of a home’s final sales price in closing costs. Your lender should provide an estimate of your closing costs when you’re first approved for a loan, updating that estimate with a final number at least three business days before closing.

Typically, the amount due is paid on the closing date, when the title for the property transfers from the previous owner to you. Most lenders follow a specific process for finalizing closing costs, which may involve wiring money from your bank account or providing a cashier’s check.

Let’s consider an example.

Example: Jessica plans to buy a home in Nutmeg, Oklahoma. She finds the perfect log cabin near Allspice Lake, which has a fantastic garden. The cabin is $200,000, and she has planned for a 10% down payment, or $20,000. Based on the 2% to 5% estimate, Jessica will owe an additional $4,000 and $10,000 in closing expenses. She has enough money to pay the fees, so she feels comfortable knowing she can make an offer on the cabin.


Options to explore if you can’t afford closing costs

If you’ve already started the homebuying process and realize you can’t afford to pay closing costs, don’t get too worried yet. You may have a few options to get you over the hump and get the home’s title in your hands:

  • Rolling the closing costs into your mortgage.
  • Lowering your down payment.
  • Working out a deal with your mortgage lender to lower your fees.

The simplest option is to simply roll the closing costs into your mortgage. Many lenders offer this option, which is helpful if you don’t have extra money in the bank. To find out whether your lender will approve a rollover, give them a call and ask if you can include closing costs in your final mortgage.

If that’s not possible, ask whether you will still qualify for the loan with a lower down payment. You may be able to apply some of the money you have saved for the down payment toward closing costs.

While both of these options will increase your monthly payment amount, chances are the difference won’t be too significant. Since a standard mortgage is 30 years, you may only pay an additional $50 to $100 monthly.

Finally, you can try negotiating with your lender. For instance, if they’re charging you a lot for loan origination, they may be willing to lower their price if you explain why you need help.

It’s a good idea to have money set aside for closing costs

Understanding what you’ll pay for closing costs helps you avoid unexpected (and unwanted) surprises. After all, no one wants to be stuck coming up with thousands of dollars at the last minute. Once you know what you’ll pay, you can ask your lender to work with you so that you can afford your new home.

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