Understanding Closing Costs
Everything you need to know about closing costs in Texas
When buying a home, the down payment isn't the only upfront cost you'll face. Closing costs are additional expenses that come due when you finalize your mortgage. Understanding what these costs include and how to prepare for them is essential for a smooth home buying experience.
What Are Closing Costs?
Closing costs are the fees and expenses you pay when finalizing a mortgage, whether for a home purchase or refinance. These costs typically range from 2% to 5% of the loan amount and are paid at the closing table when the property ownership is officially transferred.
For example, on a $300,000 home purchase, you might pay between $6,000 and $15,000 in closing costs, in addition to your down payment.
Closing Cost Quick Facts
- Typically range from 2-5% of your loan amount
- Paid at the closing table when finalizing your mortgage
- Include both lender fees and third-party fees
- Some costs may be negotiable or can be shopped for better rates
Common Closing Costs in Texas
Lender Fees
Loan Origination Fee
Typical Cost: 0.5-1% of loan amount
This fee covers the lender's administrative costs for processing your loan application, underwriting, and preparing loan documents.
Discount Points
Typical Cost: 0-3% of loan amount (optional)
Optional fees paid to lower your interest rate. Each point typically costs 1% of the loan amount and reduces the rate by 0.25%.
Application Fee
Typical Cost: $300-$500
Covers the cost of processing your initial application and running your credit report.
Underwriting Fee
Typical Cost: $300-$900
Covers the cost of evaluating your application to determine if you qualify for the loan.
Third-Party Fees
Title Insurance
Typical Cost: 0.5-1% of purchase price
Protects against problems with the title to your property. In Texas, this is often the largest closing cost item.
Appraisal Fee
Typical Cost: $300-$600
Pays for a professional assessment of the home's value to ensure it supports the loan amount.
Home Inspection
Typical Cost: $300-$500
While optional, a thorough inspection helps identify potential issues before you complete the purchase.
Survey Fee
Typical Cost: $350-$700
In Texas, most lenders require a property survey to confirm property boundaries and identify any encroachments.
Attorney Fees
Typical Cost: $500-$1,000
Covers the cost of the real estate attorney who prepares and reviews documents and conducts the closing.
Credit Report Fee
Typical Cost: $25-$50
Covers the cost of pulling your credit reports from the major credit bureaus.
Government Fees and Taxes
Recording Fees
Typical Cost: $20-$150
County charges for recording the deed and mortgage documents in public records.
Transfer Taxes
Typical Cost: Varies by location
Texas doesn't have state transfer taxes, but some municipalities may have their own fees.
Prepaid Items and Escrow Deposits
Prepaid Costs
These are expenses that you pay in advance at closing:
- Homeowners Insurance Premium: Typically the first year's premium (average cost: $1,800-$2,500 in Texas)
- Mortgage Interest: Interest from the closing date to the first payment date
- Property Tax Reserves: Several months of taxes held in escrow
- HOA Dues: If applicable, you may need to prepay a portion of annual dues
Who Pays What: Buyer vs. Seller Costs
In Texas, the distribution of closing costs between buyers and sellers can be negotiated, but there are some standard practices:
Typically Paid by Buyer
- Lender fees (origination, application, underwriting)
- Appraisal fees
- Credit report fees
- Home inspection fees
- Lender's title insurance
- Prepaid items (insurance, interest, taxes)
Typically Paid by Seller
- Owner's title insurance policy
- Real estate agent commissions
- Existing loan payoff
- Home warranty (if agreed upon)
- Property tax prorations
- Survey (in some cases)
Remember: Everything is negotiable in real estate. In a buyer's market, you may be able to ask the seller to pay for some of your closing costs. In a seller's market, you might need to cover more costs to make your offer more attractive.
How to Prepare for Closing Costs
1. Get a Loan Estimate
By law, your lender must provide a Loan Estimate within three business days of receiving your loan application. This document breaks down the expected closing costs for your specific situation.
2. Save Beyond Your Down Payment
As a rule of thumb, budget for 3-5% of your loan amount for closing costs, in addition to your down payment.
3. Compare Lenders
Shop around with multiple lenders to compare not just interest rates but also closing costs. Some lenders might offer lower fees or closing cost credits.
4. Ask About Lender Credits
Some lenders offer credits to offset closing costs in exchange for a slightly higher interest rate. This can be a good option if you're short on cash.
5. Look Into Closing Cost Assistance Programs
Texas offers various programs for first-time homebuyers that can help with closing costs. Our mortgage advisors can help you identify and apply for eligible programs.
6. Review Your Closing Disclosure Carefully
At least three business days before closing, you'll receive a Closing Disclosure. Compare it with your Loan Estimate and ask about any significant differences.
Common Questions About Closing Costs
Can closing costs be included in the loan?
For most purchase loans, closing costs cannot be rolled into the loan amount. However, for refinances, it's often possible to include closing costs in the new loan amount. FHA loans also allow some closing costs to be financed.
Are closing costs tax-deductible?
Some closing costs may be tax-deductible, including mortgage interest, property taxes, and discount points. Consult with a tax professional to understand which costs you can deduct.
Can I negotiate closing costs?
Yes, some closing costs are negotiable. You can shop around for services like title insurance and home inspection. You can also negotiate with the seller to cover some of your closing costs.
When do I pay closing costs?
Closing costs are due at the closing table when you sign the final paperwork. You'll typically need to bring a cashier's check or arrange for a wire transfer for the exact amount.
Need Help Understanding Your Closing Costs?
Our mortgage advisors at Raider Mortgage can walk you through the specific closing costs for your situation, help you explore ways to minimize them, and answer any questions you have about the closing process.