Purchasing a home is one of the largest purchases an individual can make. And whether you’re the property owner or the purchaser, it’s important to understand what closing costs are, and how they affect the real cost of this critical, sometimes life-changing decision.
Closing costs include any charges incurred at the end of a real estate transaction other than a down payment. These costs vary from state to state and include any surcharges or service costs associated with the processes of transferring ownership of a property from one owner to another.
Though closing costs usually amount to a percentage of the total amount borrowed to purchase a home, they can amount to thousands or even tens of thousands of dollars. And with property prices consistently trending upward, according to the Federal Reserve Bank of St. Louis, homeowners and sellers need to understand the unexpected costs that come with finalizing a real estate deal.
Here’s everything you should know about closing costs before signing the dotted line.
What Are Closing Costs, Exactly?
When buying a home, it’s likely you’ll have to go through numerous proceedings before the property is finally yours — and these proceedings cost money.
“Closing costs are the costs incurred by the seller and the buyer beyond the purchase price in a real estate transaction,” says Los Angeles–based real estate agent Shelton Wilder. “These typically include fees related to tax services, financial services, the recording of documents, and other processes.”
Whether it’s a loan application fee, the price of a home appraisal, attorney fees for reviewing relevant legal documentation, or the cost of insuring your mortgage, both the owner and seller of a house need to undertake a degree of due diligence when a property is transferred from one individual to another.
These varying legal, financial, and commercial charges combined are the “closing costs.”
The bulk of closing costs, on average, fall to the homebuyer, but sometimes the seller may choose or be required by state law to pay some of these final costs, according to the Consumer Financial Protection Bureau.
Some common closing costs, which we’ll get into later in this article, include:
- Loan application, origination, and underwriting fees
- Credit checks
- Prepaid daily interest on a home mortgage
- Private home insurance
- Property appraisal, home inspection, lead-based paint and pest inspections, and flood certification
- Survey fees
- Recording fees
- Title search fees and title insurance
- Transfer taxes
- Prepaid property taxes
- Real estate agent commissions
- Homeowners association fees
- Legal fees for the services of a real estate attorney
How Much Are Closing Costs?
Closing costs typically range between 2 and 5 percent of the property’s purchase price, and range widely across the country, according to a study conducted by mortgage data solutions company Closing Corp.
For example, the closing costs in Missouri were $2,063 in 2019 on an average home sales price of $202,572, while the same year closing costs in Washington, DC, totaled $25,800 for an average home sales price of $645,208, according to the same study.
The cost of closing a real estate transaction differs from state to state, and is dependent on factors specific to the property being purchased — that said, price and location are usually the greatest determinants.
“The higher the loan amount or purchase price, the higher the closing costs will be for a homebuyer, as lending fees, title, and escrow fees are based on this,” says Francine Viola, a real estate agent in Olympia, Washington.
With such a wide range of potential closing costs, it’s understandable if you feel skittish about what you’ll actually end up paying on top of your mortgage.
Thankfully, regardless of where you live, lenders are required to provide a loan estimate of closing costs to borrowers within three days after they apply for a mortgage.
This requirement is stipulated for all mortgages by the Real Estate Settlement Procedures Act (RESPA), and the amount estimated is legally binding — giving borrowers a more concrete understanding of the real price they can expect to pay.
And if the total cost of your lender’s closing costs change by more than 10 percent, they are required to notify you, according to the Consumer Finance Protection Bureau (CFPB).
“The main purpose of RESPA is to disclose fees so buyers understand all of the charges they can expect, and buyers can have time to decide if these fees are reasonable,” says Viola. “RESPA protects buyers by educating them on the closing process, what their fees are, and what their rights and obligations are as a homebuyer.”
Negotiating a Lender’s Closing Costs
If, when examining your loan estimate, you find closing costs to be prohibitively expensive, you should contact the lender to discuss the specifics of certain fees.
Some closing costs will be nonnegotiable, but other costs like survey and inspection fees are generally done by third parties; as such, you can shop around for different companies to find the best price (these costs will be identified on your closing disclosure).
It’s also recommended when searching for a home loan that you apply to multiple lenders and try to find the most affordable agreement in your search process, according to the CFPB.
As lenders are required to provide a loan estimate within three days of a loan application, buyers are provided some time to assess the loan’s total cost, ask for clarification about fees, and deliberate on which lender they’ll decide to borrow from.
Once you’ve settled on a lender, you’ll start to pay some of your closing costs; these initial costs tend to include the price of a home appraisal, a title search, an inspector to inspect the property, and an application fee when applying for a home loan.
The remaining costs are usually due at closing, and will be paid on the day you sign your final loan agreement and formally agree to purchase a home, often called your closing day.
Often you’ll be required to place money into escrow prior to closing, and pay for closing costs using part of the amount deposited.
Escrow serves as a temporary account to place funds related to home purchasing and serves as an assurance to the seller that the individual is able and willing to pay for home closing costs ahead of the sale.
Money placed by a buyer into escrow is often referred to as earnest money or a good faith deposit; it serves as a financial indication to the seller that the buyer intends to go forward with the purchase of a home.
It protects the seller in the event the buyer decides to walk away from the sale (as the buyer then forfeits this money). It also protects the buyer, as placing money in escrow comes with the home being placed under contract, meaning the seller cannot accept a higher bid from another homebuyer once the deposit is made.
Sometimes escrow is managed by a third party — one that is not the buyer or the seller — who may also require a fee for this service, though these can vary widely depending upon the amount and the company in question.
What Closing Costs Does the Buyer Pay?
Though the individual purchasing a home tends to pay the bulk of closing costs, it’s possible that a seller may pay some of the costs usually reserved for the seller.
A buyer can negotiate who pays closing costs, or even suggest that each party pays half, and some sellers may be willing to play ball.
While the specificities of a home sale’s closing costs are different for everyone, costs typically fall into one of three categories — financial, property, or legal. Here are the costs buyers are usually expected to pay:
Financial Closing Costs
At the start of the homebuying process, buyers can expect to pay for a number of financial services when they first approach their bank, credit union, or lending institution.
For starters, homebuyers typically have to pay an application fee when applying for a loan, which is an administrative charge for the time spent reviewing your financial profile.
In tandem with this, the buyer may have to pay a credit report fee, which assesses their past borrowing and repayment habits and whether they are creditworthy enough to receive a loan.
Provided the loan application is approved, a homebuyer then pays a loan origination fee — typical one of the larger closing costs.
This is the cost for the creation of your loan and the lender’s fee for underwriting your loan, which ensures you are qualified for the loan amount you applied for. This fee is usually around 1 percent of the total loan amount.
Prior to applying for a loan, the borrower may also have the option (or be required) to purchase points, which allows the homebuyer to reduce the interest rate on their mortgage, for a price determined by their lender.
Homebuyers may be required by their lender to purchase private mortgage insurance, which protects the lender in the event the borrower defaults on their mortgage, which is also included in closing costs. It’s often necessary if the buyer makes a down payment of less than 20 percent.
While this insurance protects the financial institution issuing the mortgage, it can lead lenders to issue mortgages to buyers unable to come up with a sizable down payment.
If a buyer purchases their home through a Federal Housing Administration loan, they are required to purchase home insurance — additionally, they must pay an Upfront Mortgage Insurance Premium that is 1.75 percent of the loan amount, according to the Department of Housing and Urban Development, in the week prior to closing.
If the buyer has received a home loan through the Department of Veterans Affairs (VA), at closing they can expect to pay a onetime VA funding fee, which ranges from 1.4 to 2.3 percent of the loan accepted, according to the VA website.
Finally, individuals taking on a mortgage are usually required to prepay interest through the end of the month in which they close, following their closing date.
Property Closing Costs
Homebuyers are expected to foot several costs associated with the property itself.
For instance, buyers typically pay a fee for property appraisal, usually conducted by their lender, to ensure that the value of the home is accurate, which generally costs a few hundred dollars.
This process is usually required by the lender to ensure that the value of the home supports its selling price and that it, therefore, provides sufficient collateral for the loan.
Most lenders require an individual to buy homeowner’s insurance when taking on a home loan; this is required in most contracts so that in the event the home incurs damage, the homeowner has financial recourse to pay for a repair.
The amount paid for homeowner’s insurance will vary largely depending on the value of your home and the risks related to the location of the property (including potential natural disasters).
Buyers are expected to pay the home’s property taxes as reimbursement for any property taxes the seller prepaid.
Some additional fees can also fall to the buyer, like inspecting for lead-based paint and pests — which typically cost several hundred dollars, though these costs might be negotiable.
Buyers are often required by their lender to pay a fee for surveying the property, which verifies the size of the property and notes encroachment by other structures over the property line that may affect its value.
Similarly, a lender will require the buyer to pay for a flood determination to ensure whether a property is within a flood zone and, if so, require the would-be homeowner to purchase supplemental insurance.
Legal and Local Government Costs
Transferring property from one individual to another requires several processes pertaining to the law — and the costs for these services typically fall to the buyer.
Typically, the buyer incurs their own attorney fees when a real estate lawyer drafts up the necessary legal documentation for a transfer, if they choose to enlist one for the transaction. These legal costs can vary widely. depending upon the attorney and the location in which the sale takes place,
Additionally, an attorney may enlist the services of a courier to transport pertinent legal documentation, requiring the buyer pay courier fees as well. This cost can range from a small flat cost, but some couriers charge by the mile when delivering.
Your local government also requires payment for services it renders — such as a recording fee for noting changes in public land records; these costs are determined by your county and/or state.
Finally, sellers can anticipate paying a title search fee, verifying that the seller actually owns their home — without any liens — and is legally able to sell it.
Title search companies charge a variety of prices for this service depending upon how services are priced in your area. One New York title search company, for example, priced this service at $125, but sellers can look around for more affordable options in their community.
As a precaution, homebuyers are required to purchase title insurance to safeguard against future claims that the property was illegally sold — though sometimes this cost falls to the seller.
Title insurance usually runs 0.5 percent of the home’s purchase price, according to the American Land Title Association, a trade association for real estate finance professionals.
What Closing Costs Does the Seller Pay?
Though they’re responsible for fewer costs than is the buyer, the home seller is still expected to pay a part of closing costs. These can include:
- Transfer taxes for transferring the title from the seller to the buyer, at a rate determined by local or state governments. These taxes are usually marginal — for example, New York State requires a payment of $2 for every $500 of a home’s selling price.
- Real estate agent commissions are typically paid by the seller for the services of an agent; these average between 5 and 6 percent of the home’s price, according to real estate listing website Redfin.
- If the seller is part of a homeowners association, they are expected to pay any fees owed up until the transfer of the property at the cost decided by their neighborhood organization of prying eyes and tacky taste. The seller may also pay a fee to transfer the association membership to the buyer.
- In the event that the sale of a home is reviewed by two real estate attorneys, one for the seller and the buyer respectively, then the seller will have to pay the fees for their lawyer.
Are Closing Costs Tax Deductible?
Needless to say, closing costs can tally up fairly quickly, especially when you’re on the buying end of a transaction.
Thankfully, there are certain costs that can net tax advantages, enabling both sellers and buyers to recoup some of the money spent.
“Closing costs that can be deducted in the year they are paid include some origination fees, mortgage insurance, mortgage insurance premiums (in certain circumstances), property taxes, title and recording fees, survey fees, and transfer taxes,” says Los Angeles–based real estate agent Shelton Wilder.
“Closing costs that are non-tax-deductible tend to include homeowner’s insurance premiums, monthly principal payments, and appraisal fees,” Wilder adds.
Keep in mind how much your itemized deductions will be relative to your standard deduction, and which is most financially beneficial to your taxes. Often new homeowners find it more effective to take a standard deduction, but this will depend on your specific financial situation.
How Can I Reduce Closing Costs?
It helps to read the fine print when making an important financial decision, and this is especially true when it comes to closing costs. Doing so can ensure you get the best deal on fees required by your lender, and see which closing fees the seller may be willing to accept.
If you’re buying a home, your loan estimate will itemize all closing costs, allowing you to parse each line item you’re expected to pay.
During the time between placing an offer on a home and entering into a contract, you’ll want to make some effort to negotiate closing costs and decide on terms that are acceptable to both you and the seller.
Depending on the nature of the seller — and whether it’s a buyer’s or seller’s market — you may be able to knock some closing costs off your final bill.
“Closing costs can be negotiable between the seller and the buyer, and the homebuyer can negotiate to have the seller be responsible for closing costs that are typically paid by the buyer,” says Wilder.
It helps to have a real estate professional review your documentation and act as an advocate for cutting down costs.
“I would recommend the buyer’s agent handle negotiations — for instance, the buyer can offer more for the property in order to have the seller pay for the closing costs,” Wilder advises.
Many homebuyers accept closing costs as-is, but you stand to save hundreds, if not thousands on closing costs through a back-and-forth discussion with the seller. Beyond negotiation, keeping your loan options open can also help in reducing the amount paid at closing.
“Buyers can and should shop around extensively for different lenders with different closing costs,” says Francine Viola. “Additionally, closing at the end of the month, instead of the beginning, can save on pro-rated costs like property taxes.”
Generally, the later a buyer closes on a home, the less property taxes are due to the seller at closing. But this is more so related to the period of time between closing and the last property tax payment, rather than what time of the month your closing date is.
Protecting Yourself from Predatory Lenders
Though many lending institutions conduct all business by the books, it’s necessary to watch for predatory practices.
This can include discrimination on the basis of identity (like sex, age, race, or religion), as well as the possibility that your lender is receiving a commission, or kickback, from your real estate agent — both of which are illegal according to the Equal Credit Opportunity Act and the CFPB, respectively.
If you believe that your lender is engaging in questionable behavior, your first step should be to contact the institution’s customer service line to register a complaint. If this doesn’t resolve the issue, you can submit a complaint and seek resolution through the Consumer Financial Protection Bureau (CFPB), the U.S. Department of Housing and Urban Development (HUD), and the Federal Trade Commission.
It’s also important to note if your lender’s behaviors seem intuitively untrustworthy. Lenders who state they can get you approved regardless of your credit score, require high interest or fees, ask you to sign legal documents that are incomplete, or intentionally misrepresent closing costs should be avoided.
Remember never to rush into any sort of legally binding agreement. A good lender will provide adequate time to review all pertinent documents and ask questions without rushing or pressuring you.
The Bottom Line
As a final step, ensure you have all necessary documentation when accepting a loan on closing day. This can include:
- Photo identification
- our copy of the initial loan agreement to compare with the final loan agreement
- Funds to pay closing costs in a form acceptable to the bank
- Proof that you’ve purchased homeowner’s insurance
At signing the seller and lender will in turn provide finalized documentation, such as:
- A mortgage note indicating your intention to repay the amount borrowed
- The finalized loan application with all closing costs
- The property deed and a bill of sales
- Your loan estimate, indicating how much you’ll pay in total over the mortgage’s lifespan
The cost of buying property extends well beyond your monthly mortgage payment, but knowing your closing costs can ensure additional costs stay minimal, and that you’re getting the best deal.
Knowing your home closing costs, whether you’re buying or selling, enables you to know if you’re leaving money on the table.
Seeing and understanding the costs that come with a real estate transaction allows you to move forward in confidence — so you can shift your focus toward decorating your new home.