In the world of real estate [1], there are two words that carry a significant amount of weight: down payment. And while a down payment is a large aspect of buying a home [2], closing costs are another part of the process that don't get nearly as much attention, despite being significant. "Closing costs," in simple terms, refers to a combination of different fees that must be paid in order to close on a home loan and purchase a home. These costs are generally paid by the buyer to a mortgage lender or companies responsible for inspections, appraisals, etc., but in some cases, they can be paid by the seller.

Understanding closing costs and effectively budgeting [3] to pay for them when closing day comes can be overwhelming. Don't worry, you're not alone! As confusing and stressful as buying a home is, there are plenty of people out there to offer advice on how to navigate the process.

If you're unsure about what to expect when paying for closing costs, POPSUGAR consulted Darik Tolnay [4], a loan officer and the originating branch manager for CrossCountry Mortgage, LLC., to answer your questions and soothe your jittery, homebuyer nerves.

What Are Closing Costs?

As you move through the homebuying process, it's important to have an idea of what closing costs you'll have to pay before or on closing day. There are a number of different fees that make up closing costs, but Tolnay notes that they can include the following:

• Mortgage-origination fee: The cost charged by a lender for processing a loan, which is typically one percent of the loan amount.
• Loan-discount points: The fees you pay a lender to reduce the interest rate on your loan.
• Processing and underwriting fees: The fees you pay for underwriter services. An underwriter is someone who looks at your finances and evaluates the risk of giving you a loan.
• Credit-report fee: The fee you pay a lender to pull your credit report from at least two credit bureaus.
• Appraisal fee: The fee you pay to an appraiser, either third party or through your lender, to assess the value of your home.
• Inspection fee: The fee you pay to an inspector to evaluate and determine if your home is in compliance with local codes and regulations. An inspection is a complete assessment that determines the safety and quality of the home's physical structure.
• Flood-certification fee (in some areas): The fee you pay to a third party to determine whether or not your home is in a flood zone, which can raise the risk of damage to the property.
• Prepaid interest: Money you pay at closing for any daily interest that accrues on your loan between the date you close on your home and your first mortgage payment.

The fees associated with closing costs can vary depending on the state you live in. For example, transfer taxes are usually paid by the seller, but in some states, like Pennsylvania (where I bought my home), both the seller and buyer are responsible for splitting the transfer tax. Factors like this can add to your overall closing costs, so it's best to talk with your mortgage lender, especially your loan officer, to know exactly what you have to put in savings and ultimately pay at closing.

What Are the Average Closing Costs?

The average closing costs for buyers typically fall between two percent and five percent of the home purchase price [5], but in Tolnay's experience, he has seen buyers pay an average of 1.5 percent. This percentage is influenced by several factors, such as: the state you are purchasing your home in, the type of loan you have, the size of the loan, and your mortgage lender.

Are Closing Costs Negotiable?

Closing costs may sound intimidating and absolute, but they can actually be negotiated in a few different ways. First, you can communicate directly with the seller to see if they'd be willing to offer a discount in the form of a credit to lower your overall closing costs. Tolnay suggests approaching it by saying, "Mr./Mrs. Home Seller, I'll offer you $500,000 for your house, but would like a credit of $5,000 (or the dollar amount based on what your lender tells you) for closing costs." Buyers can offer to negate home inspections to facilitate a quicker close, or simply ask for a lower down payment/earnest money as a trade-off, but the decision is ultimately up to the seller.

Another way to negotiate closing costs is to go directly to your lender. Compare loan estimates you have received from other lenders, and ask your potential lender if they can lower the price. Additionally, don't forget to ask for potential rebates and discounts, as some lenders do offer deals.

Are There Ways to Waive Closing Costs?

Just as you can negotiate closing costs, there are also ways to reduce closing costs. An overlooked way to do so is by closing on your home at the end of the month, which has an impact on the amount of prepaid interest you pay. "Have your agent negotiate the closing date to be the last day of the month, so the lender is only collecting one day of interest," Tolnay recommends. "If you closed on the first of the month, the lender would be collecting 30 or 31 days of interest, which could increase your closing costs by several hundred or thousands of dollars depending on your price point."

Additionally, shopping around for homeowners' insurance can help lower your closing costs drastically. Most people pay a year's worth of homeowners' insurance at closing, and depending on the company and coverage you have, "it can not only lower your closing costs, but also would lower your monthly mortgage payment," Tolnay explains. A popular choice among buyers is bundling auto and home insurance together, as both policies are typically discounted when purchased through the same company.

How Are Closing Costs Paid?

Before closing day rolls around, you will likely be in constant communication with your lender and real estate agent to ensure that everything is going according to plan. A few days before closing day, your lender will provide you with a closing disclosure that will detail and break down the closing costs you are responsible for. The day before or day of closing, most buyers get a certified check or a cashier's check for the total amount determined on the closing disclosure to bring to the closing table.

According to Tolnay, there are three out-of-pocket, up-front costs that aren't collected at closing but are a part of closing costs:

• Earnest-money deposit, which is "typically a dollar amount negotiated between buyer and seller that is delivered to the title company within 72 hours of the offer being accepted."
• Inspection fee
• Appraisal fee