What Are Closing Costs
Closing costs are the fees and expenses — beyond the purchase price — that buyers and sellers pay to complete a real estate transaction, typically totaling 2–5% of the loan amount.
Closing costs are the collection of fees, taxes, and prepaid expenses that must be paid at the final step of a real estate transaction — the closing. For buyers, these costs typically range from 2% to 5% of the loan amount, which on a $400,000 home could mean $8,000 to $20,000 due at the table in addition to your down payment.
Understanding what's included — and what's negotiable — can save thousands of dollars.
What's Included in Closing Costs
Closing costs are a bundle of separate charges, not a single fee. They generally fall into a few categories:
Lender Fees
- Origination fee — charged by the lender to process the loan (often 0.5–1% of the loan)
- Discount points — optional prepaid interest to buy down your rate
- Underwriting fee — cost of evaluating and approving the loan
- Application fee — some lenders charge upfront for processing
Third-Party Fees
- Appraisal — typically $300–$700
- Title search and title insurance — verifying clear ownership and insuring against future claims
- Attorney fees — required in some states
- Survey — measuring and confirming property boundaries
Prepaid Items and Escrow Deposits
- Homeowners insurance — lenders usually require the first year paid upfront
- Property tax escrow deposits — often 2–3 months of taxes prepaid
- Prepaid interest — interest that accrues from closing date to end of the first month
Buyer vs. Seller Closing Costs
Both parties pay closing costs, but the breakdown differs:
| Party | Typical Costs |
|---|---|
| Buyer | Lender fees, appraisal, title insurance (lender's policy), prepaid insurance and taxes |
| Seller | Real estate agent commissions (often 5–6% total), title insurance (owner's policy), transfer taxes |
The seller's largest single expense is almost always the agent commission, which dramatically outweighs the buyer's closing costs in dollar terms. For buyers, working with a dedicated buyer's agent means having representation in the transaction without typically paying the agent directly — commission is paid by the seller.
Loan Estimate and Closing Disclosure
Federal law (RESPA) requires lenders to provide a Loan Estimate within three business days of your application — a standardized document showing projected closing costs. Three business days before closing, you receive a Closing Disclosure with final numbers. You should compare these documents carefully and ask questions about any significant changes.
How to Reduce Closing Costs
- Shop lenders — origination fees and rates vary considerably
- Negotiate seller concessions — in slower markets, sellers may agree to cover some buyer closing costs
- Lender credits — accept a slightly higher interest rate in exchange for the lender covering some fees (effectively rolling costs into your rate)
- Ask about no-closing-cost mortgages — these exist but typically mean a higher rate or the costs are added to the loan balance
Rolling Closing Costs Into the Loan
On some loan types (like FHA or VA), it's possible to finance certain closing costs into the loan balance. This reduces your upfront cash need but increases your loan amount and total interest paid over time. It's a trade-off worth calculating carefully with a mortgage calculator before deciding.