Closing Costs Explained: What Every Buyer Should Know

What Are Closing Costs? A Complete Overview

Closing costs are the fees and expenses you'll pay when finalizing your home purchase, separate from your down payment. These costs typically range from 2% to 5% of the home's purchase price, meaning on a $400,000 home, you could expect to pay anywhere from $8,000 to $20,000 in closing costs. Understanding these expenses in advance helps you budget properly and avoid surprises at the closing table.

While closing costs can seem overwhelming at first, each fee serves a specific purpose in your real estate transaction. This comprehensive guide breaks down every common closing cost, explains who typically pays what, and provides strategies for managing these expenses.

Major Categories of Closing Costs

Closing costs can be organized into several major categories, each covering different aspects of your home purchase:

Lender Fees

If you're financing your purchase, a significant portion of your closing costs will go to your mortgage lender. These fees cover the cost of processing, underwriting, and funding your loan:

• Loan origination fee: Typically 0.5% to 1% of the loan amount, this fee covers the lender's administrative costs for processing your application
• Application fee: Some lenders charge a separate fee for processing your initial application
• Underwriting fee: Covers the cost of evaluating your creditworthiness and ability to repay the loan
• Credit report fee: Pays for pulling your credit reports from the major bureaus
• Discount points: Optional prepaid interest that lowers your interest rate (each point equals 1% of the loan amount)

Third-Party Fees

Various third-party service providers are involved in your transaction, each charging for their expertise:

• Appraisal fee: Typically $300-$600, covers the cost of having a professional appraiser determine the home's fair market value
• Home inspection fee: Usually $300-$500, pays for a thorough evaluation of the property's condition
• Survey fee: If required, covers the cost of verifying property boundaries
• Attorney fees: In some states, an attorney must review or conduct the closing
• Pest inspection: May be required in certain areas or for certain loan types

Title-Related Costs

Title services represent a significant portion of closing costs and provide essential protection for your investment. For a deeper understanding of these services, read our guide on What Is Title Insurance.

Title Search Fee

This fee covers the cost of examining public records to verify the seller's ownership and identify any claims or defects that could affect your title. The title search examines deed records, court records, tax records, and other documents. Learn more about this process in our article The Title Search Process Explained.

Title Insurance Premiums

Title insurance protects against covered title defects discovered after closing. You'll typically see two policies:

• Lender's title insurance: Required by your mortgage company, protects their investment
• Owner's title insurance: Optional but highly recommended, protects your equity

For a detailed comparison, see Owner's vs. Lender's Title Insurance: What's the Difference?

Escrow and Settlement Fees

The escrow or settlement company charges for coordinating the closing process, holding funds, preparing documents, and facilitating the transaction. For more information about this process, read Understanding the Escrow Process.

Government Fees and Taxes

Various government entities collect fees and taxes during your home purchase:

Recording Fees

The county charges fees to record your deed, mortgage, and other documents in the public records. These fees vary by location but typically range from $50 to $250.

Transfer Taxes

Many states, counties, and cities charge transfer taxes when real estate changes hands. These taxes can range from nominal amounts to several percentage points of the purchase price, depending on your location.

Property Taxes

At closing, property taxes are typically prorated between the buyer and seller based on the closing date. You may also need to prepay several months of taxes into your escrow account if your lender requires it. For more on property taxes, see our guide Property Tax Basics for Homeowners.

Prepaid Items and Escrow Funding

In addition to one-time closing costs, you'll likely need to prepay certain items and fund your escrow account:

Homeowner's Insurance

Your lender will require proof of homeowner's insurance before closing. You'll typically need to prepay the first year's premium before closing and may need to deposit additional months into your escrow account.

Prepaid Interest

You'll pay interest on your mortgage from the closing date through the end of that month. This "per diem" interest ensures your regular mortgage payments begin on the first of the following month.

Escrow Account Funding

Your lender may require you to deposit several months of property taxes and insurance premiums into an escrow account at closing. This creates a cushion to ensure funds are available when these bills come due. For ongoing escrow management tips, read Managing Your Escrow Account.

Who Pays Which Closing Costs?

The division of closing costs between buyers and sellers varies by location and is often negotiable. Here's a general guide:

Costs Typically Paid by Buyers

• Loan-related fees (origination, appraisal, credit report)
• Lender's title insurance
• Home inspection
• Prepaid items (insurance, taxes, interest)
• Recording fees for the deed and mortgage

Costs Typically Paid by Sellers

• Real estate agent commissions
• Transfer taxes (in many areas)
• Owner's title insurance (in some areas)
• Recording fees for documents clearing their liens

Costs That May Be Negotiable

• Owner's title insurance
• Escrow fees
• Home warranty
• Repair credits

How to Prepare for Closing Costs

Proper preparation helps ensure you're ready for closing costs when the time comes:

Get Your Loan Estimate Early

Within three business days of applying for a mortgage, your lender must provide a Loan Estimate that itemizes expected closing costs. Review this document carefully and compare estimates if you're shopping multiple lenders.

Request a Closing Disclosure

At least three business days before closing, you'll receive a Closing Disclosure with final figures. Compare this to your Loan Estimate and question any significant changes.

Budget Conservatively

Plan for closing costs at the higher end of the typical range (5% of purchase price) to avoid coming up short. Any savings become a pleasant surprise rather than a scramble for additional funds.

Understand Your Cash Needs

Calculate your total cash required at closing:

• Down payment
• Closing costs
• Minus earnest money already deposited
• Plus any reserves your lender requires

Strategies to Reduce Closing Costs

While some closing costs are fixed, there are strategies to potentially reduce your out-of-pocket expenses:

Shop Around

Compare costs from multiple lenders, title companies, and service providers. Even small savings on each fee can add up significantly.

Negotiate with the Seller

In some markets, sellers may agree to pay some of your closing costs as part of the negotiation. This is more common in buyer's markets or when a seller is motivated.

Ask About Discounts

Some title companies offer discounts for simultaneous purchase of owner's and lender's policies, or for refinancing within certain timeframes.

Consider No-Closing-Cost Loans

Some lenders offer mortgages with no upfront closing costs. However, these typically come with higher interest rates, so calculate the long-term cost before choosing this option.

Look Into Assistance Programs

First-time homebuyer programs, grants, and employer assistance programs may help cover closing costs. Research what's available in your area.

Wire Fraud Warning

As you prepare to wire your closing funds, be extremely cautious about wire fraud. Criminals target real estate transactions by sending fake wire instructions that redirect your funds to their accounts.

Always verify wire instructions by phone using a number you know to be legitimate—never trust information provided via email alone. Read our comprehensive guide on Protecting Yourself from Wire Fraud for essential safety tips.

The Bottom Line on Closing Costs

Closing costs are a significant but necessary expense in any home purchase. By understanding what to expect, budgeting appropriately, and taking steps to minimize unnecessary costs, you can approach closing day with confidence.

If you're a first-time homebuyer, our First-Time Homebuyer's Guide to Title and Escrow provides additional context for navigating this process. And as always, your title and escrow professionals are here to answer questions and guide you through every step of closing.