The Truth about Down Payment and Closing Costs

This week, I started working with a client who was interested in seeing what the numbers would look like to buy a home. She told me she wanted to buy a home for around $700,000 and put down about $200,000. However, after asking a few more questions, I discovered that she had a total of $200,000 for both the down payment and closing costs. She had not realized that the funds she set aside for buying a home needed to be allocated for both.

So, I thought that I would use this week’s newsletter to talk about closing costs.

When you buy a house, you have three buckets of closing costs: lender’s fees, title company fees, and state and county taxes. Most of those fees are not controlled by the lender. The buyer chooses the title company, and the state and county fees are formulas.

In addition to the actual transaction fees, there are also things that you pay for at closing that are just a part of owning the home. You will need to pay interest for the month of closing, and homeowner’s insurance is paid a year in advance. You will also need to set up an escrow account so that when the taxes and insurance come due, there will be enough money for the lender to pay them on your behalf.

All of this adds up to between 2.5% and 3% of the sales price. The range is partly due to where you buy. DC tends to be closer to 3%, and Virginia is closer to 2.5%. Maryland is in the middle. Since my client was looking to buy in DC, she needed to set aside $21,000 for her closing costs and prepaids, leaving her with $179,000 for the down payment.

If you would like to see more specific numbers for closing costs and prepaids, please contact us.