Why You Should Budget for Closing Costs

When buying a home, most people focus on the purchase price, mortgage rates, and down payment. But one crucial piece of the puzzle often catches first-time buyers off guard — closing costs.

These are essential fees and services that finalize your home purchase. And while there’s no escaping them, understanding what they are and planning ahead can help you reduce stress — and even save money.

What Are Closing Costs?

Closing costs are the fees and expenses you’ll need to pay when your home purchase is finalized, or “closed.” These typically include:

• Legal and title search fees

• Title insurance

• Transfer taxes (if applicable)

• Bank and loan origination fees

• Prepaid expenses like property taxes and homeowners’ insurance

On average, these fees add up to between 1% and 5% of your home’s purchase price — not exactly pocket change.

According to CoreLogic, average closing costs in the U.S. hover around $6,900 (including transfer taxes). Some states are more affordable — Colorado and California, for example, average 1% or less. Others, like Washington D.C. and Delaware, can soar to 3.9% and 5.4% respectively.

Planning Ahead Can Save You Stress

Zillow reports that closing costs are among the most stressful parts of buying a home. The best way to reduce anxiety? Plan ahead and do your homework. Start by using a closing cost calculator to estimate what you might owe based on your location and price range.

Also, don’t forget that on closing day, you’ll likely need to prepay for:

• The interest on your mortgage for that month

• Your property taxes

• Homeowners’ insurance

That can be a large lump sum — so budgeting ahead is key.

Breaking Down the Main Fees

Here’s a quick rundown of the major closing costs you’ll encounter, and how to navigate them smartly:

1. Title Search & Title Insurance

This process ensures the home’s title is legitimate and free of any liens or debts. It’s essential for protecting your investment — and your lender will require it.

2. Homeowners’ Insurance

You must secure insurance before your lender releases funds. Pro tip: if you already have auto insurance, bundling policies can save you money.

3. Conveyancing or Legal Fees

A conveyancer, attorney, or escrow company will manage the legal paperwork and final transfer. You’re not obligated to use your lender’s recommended providers — get quotes and referrals from people you trust.

4. Sundry Expenses

Think courier services, notary fees, recording fees, and funding charges. These small costs can add up, so ask for a full breakdown before applying for a mortgage.

Can You Avoid These Costs?

Some lenders offer a “no-fee” loan, which rolls your closing costs into the mortgage. But beware: this often results in a higher interest rate — costing you more over the life of the loan. In most cases, it’s better to budget and pay your closing costs upfront if you can.

Final Thought

Buying a home is exciting, but it’s also a big financial commitment. Budgeting for closing costs upfront helps you avoid surprises — and sets you up for a smooth transaction from start to finish.

If you’re getting ready to buy or want guidance through the process, feel free to reach out to a trusted real estate professional today. A great agent will help you navigate these expenses and connect you with affordable, reputable service providers.

Disclaimer: This blog is for informational purposes only. Please consult with a financial advisor or licensed mortgage professional for advice tailored to your situation.