What Are Closing Costs?

What Are Closing Costs?

Closing costs are the fees that must be paid to finalize many types of home loans. They're generally paid upfront at closing, but some fees may be due at the time of service (such as when your home is inspected). Additionally, some lenders and loan programs may allow you to roll a portion of your closing costs into your monthly mortgage payments if you meet certain requirements.

What's Included in Closing Costs?

Depending on your lender, state and other requirements, you may be responsible for some or all of the following types of fees and costs when it's time to close on your home.

Origination Fee

Lenders charge origination fees to cover the administrative costs of making a loan, including reviewing the application, underwriting the loan and disbursing the funds. Origination fees vary by lender but generally range from about 0.5% to 1% of the loan amount.

Discount Points

Although not required, buyers may choose to purchase mortgage points in exchange for a lower interest rate on their mortgage. One point is typically equal to 1% of the loan amount and may reduce your interest rate by up to 0.25%.

Even a slightly lower rate can result in thousands of dollars of savings over the life of the loan, making your monthly payments more affordable.

Appraisal Fee

A home appraisal is a formal assessment of a property's fair market value. Appraisals help protect lenders by ensuring you don't borrow more than the home you're buying is worth. They typically cost $250 to $450, though fees could increase substantially depending on location and loan type.

Home Inspection Fee

Home inspections are a valuable part of the homebuying process that can help buyers identify materials defects or structural issues that may affect a house's purchase price. The cost to complete a home inspection generally ranges from $300 to $500. Although you typically have to pay the fee at the time of inspection, it's considered a closing cost.

Recording Fee

When ownership of the property transfers to the buyer, this fee covers the cost to legally record the deed, listing the buyer as the new owner. The fee typically ranges from $20 to $250.

Credit Report Fee

When lenders pull your credit reports to review your credit history, they pay a fee that they pass along to the borrower. The cost is usually around $30.

Title Search Services

A title search confirms a seller's right to transfer the property to another person and flags any liens that may have to be cleared before the sale can be completed.

Title Insurance Premium

Title insurance helps protect the lender and owner from costs that may arise if someone files a lawsuit for a claim they have against the property, such as unpaid property taxes or contractor fees. Lender title insurance is usually required, while owner title insurance may be optional.

Transfer Tax

Local and state governments charge a tax to transfer ownership of the home to the buyer.

Prepaid Daily Interest

Interest that accrues from the day you close until your first mortgage payment is due must usually be paid in advance at closing.

Closing or Escrow Fee

Not to be confused with closing costs, which encompasses all of the fees you must pay to finalize your mortgage, the closing fee is paid to the escrow company that facilitates your loan closing. It varies by company, but is generally 1% to 2% of the loan amount.

Real Estate Agent Sales Commissions

If you're buying or selling a property, real estate agents representing the buyer and seller typically split a commission of around 5% to 6% of the sale price. Sellers still often pay the commission, but recent industry changes mean it's not a given. Check with your agent ahead of closing to find out how they're typically handled in your market.

Mortgage Insurance

Mortgage insurance helps protect the lender if you're unable to make your monthly payments, but it isn't required for every mortgage. It's usually required on conventional loans if you're putting less than 20% down, as well as FHA and USDA loans.

Homeowners Insurance

Homeowners insurance helps pay to repair or replace your home and belongings if they're damaged or destroyed in a covered event. Lenders often require borrowers to pay for a full year of homeowners insurance upfront at closing.

Tip: Insurance can be pricey, but skimping on coverage can put your finances at risk. Comparing offers from multiple providers can help you get the coverage you need at an affordable rate.

Flood Certification Fee

This fee covers the cost to determine whether the property is located in a flood zone and may also include a fee for monitoring the area for the duration of the loan.

Survey Fee

Some localities and lenders require borrowers to get a land survey to confirm the property's boundaries before settlement. The cost for this service varies based on location, the size of the property and the level of detail the survey provides.

Tax Monitoring and Tax Status Research Fee

These fees cover the lender's cost to confirm the property taxes that will be assessed on the home and ensure you're making your payments on time.

Pest Inspection

Certain bugs and other critters may damage your home to the point that the structural integrity is compromised. This fee covers the cost of having a professional conduct an inspection of the interior and exterior of the home to check for pests and damage to the property.

Flood Insurance

If you live in a flood zone and have a government-backed mortgage, you must maintain flood insurance. Some lenders may also require you to have flood insurance even if you don't live in a high-risk zone or have a government-backed mortgage.

Flood insurance is separate from homeowner's insurance. If you're required to maintain a policy, you may need to pay the premium upfront when you close on your loan.

Property Taxes

Local governments assess taxes on property owners to help pay for schools, trash pickup, infrastructure, parks and other projects and services that benefit the community. Buyers may have to pay six to 12 months of property taxes at closing.

Real Estate Attorney's Fees

These fees cover the cost to have a real estate attorney review the sales contract before the sale is complete. Depending on where you live, attorney fees may be required or optional.

Other Fees

In addition to the fees listed above, there may be other charges you have to pay at closing, depending on your loan type, the home you buy and where the property is located. For example, if the house is in a neighborhood governed by a homeowners association (HOA), there may be various HOA fees you have to cover at closing. If you're getting a VA loan, it comes with a one-time VA funding fee.

There may also be other miscellaneous fees you're responsible for as well.

How Much Are Closing Costs?

Closing costs generally range from 2% to 5% of the house's sale price. For example, if a home sells for $450,000, closing costs would typically come in between $9,000 and $22,500. However, costs can vary significantly based on multiple factors, including where you live, the type of loan you get, your down payment amount, whether you opt to purchase points and more.

Your real estate agent or loan officer can help you understand how much you might expect to pay for your specific transaction.

Who Pays Closing Costs?

Both the buyer and seller pay closing costs, but the buyer is responsible for the bulk of the fees. While taxes are set by local regulations, other closing costs such as the agent's commission might be negotiable, which may help reduce the amount you owe.

How to Reduce Closing Costs

You won't be able to avoid paying closing costs altogether, but you may be able to reduce the amount you owe. Here's how.

Ask the Seller for Help

If you're purchasing a home, you can ask the seller to help pay for part of the closing costs when you submit your offer. The success of this strategy often depends on your local real estate market and how motivated the seller is to offload the property. Sellers may be more willing to help with closing costs in areas with excess supply or low demand than in areas where demand is high or supply is low.

Even if a seller may be willing to cover part of your closing costs, they may not be able to pay for all of them. The maximum amount a seller can contribute to closing costs on an FHA or USDA loan is 6% of the purchase price, while sellers may contribute up to 4% of the sale price on a VA loan plus unlimited amounts for certain fees.

On conventional loans, they may contribute 3% to 9% of the purchase price, depending on the size of the down payment.

Compare Loan Offers From Multiple Lenders

Closing costs can vary between lenders. Within three days of receiving your mortgage application, each lender that approves your application must send you a loan estimate that includes a section with anticipated closing costs, including estimated taxes and lender fees. Comparing mortgage loan offers from multiple institutions may help you identify lenders with lower closing costs.

Hire Your Own Professionals

Real estate agents and lenders typically work with short lists of professionals, such as home inspectors, appraisers and title-search providers. Getting a referral is convenient, but not necessarily the most cost-effective approach. If you're willing to do a little research to find your own vendors, you may be able to find less expensive options. Don't just go with the cheapest option either—be sure to vet anyone you hire to ensure they're qualified.

Consider No-Closing-Cost Loans

Some lenders advertise no-closing-cost mortgages that can minimize the amount of cash you have to bring to settlement. However, they may increase other expenses. For example, the lender may roll closing costs into your loan amount for you to repay over time or you may have to pay a higher interest rate on your loan.

Frequently Asked Questions

The Bottom Line

Closing costs can significantly increase the amount you have to pay to purchase, refinance or tap the equity in your home. Because your lender is required to provide a loan estimate that details all of the closing costs you're responsible for after they approve your application, there shouldn't be any surprises at settlement.

Creating a budget and setting aside cash for these fees before applying for a loan can help make the day you close a happy one.