Understanding Realistic Closing Costs for a Conventional Mortgage

Hello, I’m Kit Lancaster, CFP® at Sterling Edge Financial. If you’re preparing to buy a home with a conventional mortgage, you’re probably asking: “How much should I expect to pay in closing costs?” This is a crucial question, and knowing what to expect can help you plan and avoid surprises. Let’s break it down in simple, straightforward terms—so you can move forward with confidence.

What Are Closing Costs?

Closing costs are the collection of fees and expenses you pay at the end of your home purchase, separate from your down payment. These costs cover everything from lender fees to title insurance and government charges, ensuring your home purchase is legal and secure.

How Much Should You Budget?

For a conventional mortgage, closing costs usually range from 2% to 5% of your loan amount. For example, if you’re buying a $400,000 home with a 20% down payment, your loan amount would be $320,000. That means your closing costs could fall between $6,400 and $16,0001 7.

Fannie Mae’s Closing Costs Calculator is a great resource to estimate these costs based on your location, home price, and loan details. It’s normal for costs to vary by region, lender, and even the specific services you choose, so using a calculator can help you set a realistic budget1 2 7.

Common Closing Cost Components

Here are the most typical fees you’ll see at closing, as outlined by Fannie Mae:

Origination Fees: Charged by your lender for processing your loan. This can include appraisal, credit report, and processing fees.
Settlement and Title Fees: Cover document preparation, title insurance (protects against ownership disputes), and closing services.
Third-Party Fees: Payments for services like home inspections, homeowners association (HOA) dues, and initial homeowners insurance premiums.
Taxes and Government Fees: Property taxes, recording fees, and transfer taxes required by your local government1.

Why Do Closing Costs Vary?

Several factors influence your final closing costs:

Location: State and county taxes or fees can differ widely.
Loan Amount: Higher loan amounts generally lead to higher closing costs in dollar terms, but the percentage may decrease.
Lender and Service Providers: Some lenders and title companies charge more than others. Shopping around can help reduce costs.
Buyer Profile: First-time and low-income buyers may see higher percentages relative to the purchase price, but often lower dollar amounts.

Tips to Manage and Reduce Closing Costs

Shop Around: Get Loan Estimates from several lenders to compare fees and terms1.
Negotiate: Some fees, especially lender and title charges, may be negotiable.
Ask About Credits: Sometimes, sellers or lenders will offer credits to offset your closing costs.
Review Your Loan Estimate: This standardized form breaks down all expected costs. Review it carefully and ask questions.

Fannie Mae’s Guidance and Tools

Fannie Mae is a leading authority in mortgage financing and provides helpful tools like the Closing Costs Calculator to empower buyers. Their guidance emphasizes transparency and encourages consumers to shop around and ask questions to ensure they’re getting fair terms1 2 7.

Final Thoughts

Closing costs are a necessary part of buying a home, but with the right information and a little planning, you can avoid surprises and make confident decisions. At Sterling Edge Financial, our mission is to empower you with knowledge and support at every step. If you have questions about your specific situation, let’s talk—we’re here to help you navigate your home purchase with clarity and confidence.

Ready to take the next step? Schedule a consultation with us today.

References

This content is being provided for informational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Sterling Edge Financial LLC. are not affiliated.