Closing costs are fees and expenses you pay when you close on your house, beyond the down payment. These costs can run 3 to 5 percent of the loan amount and may include title insurance, attorney fees, appraisals, taxes and more.

This article can help you plan for closing costs, but be sure to talk to your mortgage lender about the specifics for your home purchase.

• What are Closing Costs?
• What do Closing Costs Include?
• What are Examples of Closing Costs?
• How can you Reduce Closing Costs?
• Who Pays Closing Costs at Closing?
• How can I Avoid Paying Closing Costs?
• What if I Can’t Afford Closing Costs?

What are Closing Costs?

Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.

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Costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners’ insurance. The lender is required by law to state these costs in a “good faith estimate” within three days of a home loan application. Gifts of equity still incur closing costs.

What do Closing Costs Include?

Closing costs occur when the title of property is transferred from the seller to the buyer. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between 2% to 5% of the purchase price, but closing costs may be paid by either the seller or the buyer.

A real estate transaction is a somewhat complex process with many players involved and numerous moving parts. Some states (and some loan products) require certain inspections beyond the basic inspection you pay directly to a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees.

Homebuyers in the U.S. pay, on average, $5,749 for closing costs, according to a 2019 survey from ClosingCorp, a real estate closing cost data firm. 

The survey found the highest average closing costs in parts of the Northeast, including the District of Columbia ($25,800), Delaware ($13,273), New York ($12,847), Maryland ($11,876), and Pennsylvania ($10,076). Washington is the only state outside the northeast to fall among the highest closing costs ($12,406). The states with the lowest average closing costs included Indiana ($1,909), Missouri ($2,063), South Dakota ($2,159), Iowa ($1,194) and Kentucky ($2,276).

Laws require lenders to provide a loan estimate that reveals the closing costs on the property. Under the Real Estate Settlement Procedures Act (RESPA), lenders are required by law to provide this estimate, also known as a good faith estimate, within three days of the lender taking a borrower’s loan application.

At least three days prior to the closing, the lender should also provide a closing disclosure statement outlining all closing fees. The listed fees may have changed from the loan estimate.

What are Examples of Closing Costs?

Origination fees are fees charged by the bank for the creation of a loan. The fee typically amounts to 1% of the mortgage. The buyer can purchase discount points upfront to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are negotiable and can be covered by the bank. Private mortgage insurance is an additional fee applied to any purchase with a down payment less than 20%

Title insurance protects the lender from claims against the house and protects the buyer from past contractors making claims against the property. Lenders often require an appraisal, which can cost up to $400 in most areas. Local governments charge recording fees and taxes to record the sale of property. These transfer taxes vary from state to state.

All of the closing costs will be itemized on the loan estimate and closing disclosure. Here are the standard fees you can expect to see:

Application Fee

• A fee charged by the lender to process your mortgage application. Ask the lender for details before applying for a mortgage.

Attorney Fee

• A fee charged by a real estate attorney to prepare and review home purchase agreements and contracts. Not all states require an attorney to handle a real estate transaction.

Closing Fee

• Also known as an “escrow fee,” this is paid to the party who handles the closing: the title company, escrow company or an attorney, depending on state law.

Courier Fee

• If you’re signing paper documents, this fee helps expedite their transportation. If the closing is done digitally, you might not pay this fee.

Credit Report Fee

• A charge ($15 to $30) from a lender to pull your credit reports from the three main reporting bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.

Escrow Deposit

• Some lenders require you to deposit two months of property tax and mortgage insurance payments at closing.

FHA Mortgage Insurance Premium

• FHA loans require an up-front mortgage insurance premium (UPMIP) of 1.75% of the base loan amount to be paid at closing (or it can be rolled into your mortgage).  There’s also an annual MIP payment paid monthly that can range from 0.45% to 1.05%, depending on your loan’s term and base amount.

Flood Determination and Monitoring Fee

• A fee charged to a certified flood inspector to determine whether the property is in a flood zone, which requires flood insurance (separate from your homeowner’s insurance policy). Part of the fee includes ongoing observation to monitor changes in the property’s flood status.

Homeowners’ Association Transfer Fee

• If you buy a condominium, townhouse, or property in a planned development, you must join that community’s homeowners’ association. This is the transfer fee that covers the costs of switching ownership, such as documents. Whether the seller or buyer pays the fee may or may not be in the contract; you should check in advance. The seller should provide documentation showing HOA dues amounts and a copy of the HOA’s financial statements, notices and minutes. Ask to see these documents, as well as the bylaws, covenants, conditions, and restrictions (or CC&Rs) and rules of the HOA before you buy the property to ensure it’s in good financial standing and it’s a place you want to live.

Homeowner’s Insurance

• A lender usually requires prepayment of the first year’s insurance premium at closing.

Lender’s Title Insurance

• An up-front, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that it didn’t find in the title search.

Lead-Based Paint Inspection

• A fee paid to a certified inspector to determine if the property has hazardous, lead-based paint.

Points

• Points (or “discount points”) refer to an optional, up-front payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount. In a low-rate environment, this might not save you much money.

Owner’s Title Insurance

• This policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts.

Origination Fee

• This charge covers the lender’s administrative costs to process your fee and is typically 1% of the loan amount. Some lenders do not charge origination fees, but usually, charge a higher interest rate to cover costs.

Pest Inspection

• A fee that covers the cost of a professional pest inspection for termites, dry rot or other pest-related damage. Some states and some government-insured loans require the inspection.

Prepaid Daily Interest Charges

• A payment to cover any interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.

Private Mortgage Insurance (PMI)

• If your down payment is less than 20%, your lender might require PMI. You might be required to make the first month’s PMI payment at closing.

Property Appraisal Fee

• A required fee paid to a professional property appraisal company to assess the home’s fair market value used to determine your loan-to-value (LTV) ratio.

Property Tax

• At closing, expect to pay any property taxes that are due within 60 days of the home purchase.

Rate Lock Fee

• A fee charged by the lender for guaranteeing you a certain interest rate for a limited period of time, typically from the time you receive a preapproval until closing.

Recording Fee

• A fee charged by your local recording office, usually city or county, for the recording of public land records.

Survey Fee

• A fee charged by a surveying company to check property lines and shared fences to confirm a property’s boundaries.

Tax Monitoring and Tax Status Research Fees

• A third-party fee to keep tabs on your property tax payments and to notify your lender of any issues with your property tax payments, such as late or failed payments.

Title Search Fee

• A fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensure that no outstanding ownership disputes or liens exist on the property.

Transfer Tax

• A tax levied to transfer the title from the seller to the buyer.

Underwriting Fee

• A fee charged by the lender for underwriting your loan. Underwriting is the research process of verifying your financial information, income, employment and credit for final loan approval.

VA Funding Fee

• If you’re a VA borrower, this fee, charged as a percentage of the loan amount, helps offset the loan program’s costs to U.S. taxpayers. The amount of the funding fee depends on your military service classification and loan amount; the fee can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.

Another big fee: real estate commissions. Buyers don’t pay this fee, though; sellers do. Typically, the commission fee is 5% to 6% of the home’s purchase price, and it’s split evenly between the seller’s agent and the buyer’s agent.

How can you Reduce Closing Costs?

It might feel like you can’t afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. However, there are ways to negotiate these fees.

1. Shop around. This applies to lenders and third-party services, such as homeowner’s insurance policies and title companies. Many homebuyers don’t realize they can save significant money on closing costs if they compare fees from lender to lender. Also, you don’t have to use the title company, pest inspector or homeowner’s insurance agent your lender suggests. Do some homework, and you could save some serious cash on those fees.

2. Schedule closing at the end of the month. A closing date near or at the end of the month helps cut down on prepaid daily interest charges. A lender can run this scenario for you to figure out how much you might save.

3. Appeal to the seller for help. You might be able to get a seller to either lower the purchase price or to cover a portion (or all – if you’re really lucky) of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. In many hot housing markets, though, conditions favor sellers so you might get pushback or a flat-out “no” if you ask for a seller’s help. It doesn’t hurt to ask.

4. Compare the loan estimate and closing disclosure forms. When you get your initial loan estimate, review it with a fine-tooth comb. If you’re unsure about what a fee entails or why it’s being charged, ask the lender to clarify. A lender who can’t explain a fee or pushes back when queried should be a red flag. Likewise, if you notice new fees or see noticeable increases in certain closing fees, ask your lender to walk you through the details. It’s not uncommon for closing costs to fluctuate from pre-approval to closing, but big jumps or surprising additions could impact your ability to close.

5. Negotiate loan-specific fees. If you suspect a lender is adding on unnecessary fees, known as “junk fees,” on your loan, speak up. Ask the lender to remove or reduce fees if you notice duplication. Comparison shopping can be your ally in reducing closing costs, as well as finding competitive terms and rates. Be especially wary of excessive processing and documentation fees.

6. Roll closing costs into your mortgage (as a last resort). In some instances, lenders will offer to pay your closing costs or roll them into your loan. But you’re not off the hook; lenders tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on your loan – and on closing costs.

Who Pays Closing Costs at Closing?

Typically, both buyers and sellers pay closing costs, with buyers generally paying more than sellers. The buyer’s closing costs typically run 5  to 6 percent of the sale price, according to Realtor.com.

The buyer’s closing costs typically include:

• Loan-related fees
• Credit report fees
• Title search fee
• Lender’s title insurance (typically required for a mortgage)
• Home inspection fee
• Appraisal fee
• Survey fee (if applicable)
• Settlement fee (if applicable)
• Buyer’s attorney fees (if applicable)

The main closing cost for the seller can include:

• Fees for buyer’s title insurance policy
• Mortgage payoff and prepayment penalty (if applicable)
• Outstanding amounts owed on the property
• Seller’s attorney fees (if applicable)
• Transfer taxes and recording fees

The buyer may ask you to pay some or all of their closing costs. If you agree to do so, this will be reflected in your net proceeds.

Sellers are usually also responsible for paying both real estate agents’ commissions, which can cost another 5 to 6 percent of the sale price. Your closing costs, as a seller, will be deducted from proceeds you make on the home unless you have low equity, in which case you may need to cover some expenses out of pocket. The amount of money you walk away with after these costs is referred to as your net proceeds.

How can I Avoid Paying Closing Costs?

Whether you’re buying a home or refinancing your existing mortgage, the process of obtaining a home loan can be confusing and daunting. This is especially true when it comes to the laundry list of fees associated with getting a mortgage.

It can be very difficult to understand all the fees and closing costs, not to mention whether or not you’re being overcharged. Shopping around for the lowest closing costs could potentially save you tons of money.

So how can you save on your mortgage closing costs? Here are nine helpful tips:

1. Determine which services can be shopped, then shop around

Most people know to shop around when it comes to mortgage rates. But you shouldn’t stop there.

The Loan Estimate details which “Services You Can Shop For” and which “Services You Cannot Shop For”. For example, while you can’t shop around for appraisal fees, you can shop title insurance and pest inspection fees.

Although lenders aren’t required to provide an estimate before you apply for a loan, you should be able to get some ballpark figures when it comes to closing costs. Getting quotes from more than one lender is the number one piece of advice when it comes to mortgage shopping.

Speaking to local lenders is very important, especially when it comes to comparing closing costs.

2. Know which fees can change

Many would-be and current homeowners don’t know that certain fees listed on your Loan Estimate are locked in and others can change.

If you use a company recommended by your lender, your title services, lender’s title insurance and owner’s title insurance can’t increase by more than 10% at closing. However, if you chose to use service providers not listed in the Loan Estimate, there’s no limit on how much the costs could rise.

Closing costs have gotten clearer since the Loan Estimate replaced the GFE, but it’s still worth reviewing your Loan Estimate carefully.

3. Save on discount points when mortgage rates are low

Homeowners and buyers have the option to pay discount points in exchange for a lower interest rate. However, experts say paying points may not be worth it when mortgage rates are already low.

“I would suggest not buying down an interest rate,” says Mark Hanley, a mortgage officer in Austin, Texas. Paying upfront discount points can seem unnecessary when rates are really low already, he says.

However, Keith Gumbinger, vice president of HSH.com, says there can be valid reasons to pay points when mortgage rates are low, especially if you plan on remaining in the home for a long stretch.

Speak with your lender about whether or not paying points makes sense based on your situation.

4. Be leery of significantly higher or lower estimates

Although closing costs can vary by state, most third-party fees should be somewhat comparable.

If you receive a quote that has a third-party charge that is much higher or lower than the average charge, you should ask about it. Be sure that you are satisfied with their answer before you choose to use them as your lender or title insurance provider.

5. Shop and compare homeowner’s insurance

Moira Vahey, spokesperson for the Consumer Financial Protection Bureau (CFPB), says even though the CFPB recently issued rules that “provide consumers with options to avoid costly force-placed insurance,” the best way to avoid pricier insurance is to shop around.

It’ll reduce your closing costs and save you money long-term on your insurance premiums.

To review a list of home insurance carriers, visit Insure.com and search for “best insurance companies.” Your lender can typically provide recommendations for insurance companies as well.

6. Ask the seller to pay for some or all closing costs

If you’re buying a home and you’re tight on cash, you can always ask the seller to help pay for part or all of your closing costs.

Getting help from the seller isn’t easy in a hot seller’s market. However, if the seller is motivated enough to make the transaction, you may save some money on closing costs in the process.

Check with your real estate agent for advice on if you should negotiate closing costs with the seller. Typically, rather than asking for certain services to be paid, it’s best to request a specific dollar amount.

Bear in mind that certain loan programs have limits on how much the seller is allowed to contribute. Ask your lender if there are limitations based on your loan.

7. Be careful with no closing cost mortgage offers

No cost home loans aren’t new. Most mortgage companies offer different variations of no closing cost mortgage loans.

Be aware of the “catch” that comes with a no cost mortgage.

No cost mortgages are done by exchanging a higher interest rate for a lender credit. The lender credit is then applied to your closing costs. While this can be a good option if you’re tight on funds, it can also cost you more over the long haul depending on how long you live in your home. The best way to pay mortgage closing costs will depend on your time frame and your finances.

8. Close at or near the end of the month

Prepaid interest is one of the fees that come into play when buying or refinancing a home. Closing toward the end of the month can save on prepaid interest.

With a new home loan, you need to prepay interest that accrues from the closing date to the end of the month.

For example, if you close on July 11, you’ll have to pay for 20 days of interest. On a $200,000 loan with a 4.5% mortgage rate, that’s almost $500. By closing on July 30, you’ll only pay interest for July 30 and 31. Using the same loan amount and interest rate, two days of interest is only $49.

You can save hundreds of dollars, even thousands, by understanding how you to save on closing costs. That money could be better spent going into your home, as opposed to on your home loan.

What if I Can’t Afford Closing Costs?

Having to come up with both closing costs and a down payment out-of-pocket is more than some borrowers can handle. In fact, these expenses alone cause many to put off buying a home. However, if you have money for a down payment, don’t let closing expenses crush your dreams – instead, strike a deal with the seller to pay for your closing costs.

Some types of loans require that you pay a percentage toward your closing costs, but in most cases, lenders allow the seller to foot the entire bill. Ultimately, the majority of lenders don’t care where the money comes from – they just want to be paid.

But how do you get the seller to take on this added and often appreciable expense?

1. Pay the Full Asking Price

Understand that home sellers aren’t obligated to pay your closing costs. It’s a nice gesture on their part, and this helps ensure a quick sale. If you’re thinking about asking the seller to flip the bill, get on his or her good side.

When writing your bid or offer for the house, talk to your Realtor about offering the full asking price. Sellers expect bidders to offer a lower price for properties. Thus, many sellers pad the asking price to give themselves a little wiggle room.

For example, if a seller wants $200,000 for a house, he or she might ask for $210,000. In some cases, the seller doesn’t expect to get the original asking price. But if you were to offer the full asking price and request closing costs assistance, there’s a good chance the seller will jump at your offer and comply with your request.

2. Be Ready to Close

If the seller has already purchased another house and needs to move quickly, negotiate closing costs assistance in your contract and agree to a quick closing. This method works well with motivated sellers who need to get out from under the mortgage loan quickly. Some may be willing to do whatever it takes – even if it means taking a lower profit or even no profit from the sale.

It takes, on average, about 30 days to close on a mortgage loan. But if you’ve already secured your financing and you’re ready to move, you can close on a mortgage loan in as little as two weeks. Get pre-approved before agreeing to a quick closing, and have cash ready for your home inspection and home appraisal.

3. Avoid Excessive Demands

Home sellers aren’t looking to spend a lot of money updating their properties before selling. They prefer to save this cash and put the money toward their down payment on a new place. Therefore, you may be able to get a seller to pay your closing costs by accepting the house “as-is.” However, do request that the seller fix any items that didn’t pass the inspection.

Just realize that if you make excessive demands and request unnecessary upgrades, you may miss the opportunity to receive assistance wtih closing costs. As a rule of thumb, remember that the less a seller has to spend on the property, the more likely he or she will assist with your closing.

4. Meet the Seller Halfway

In some cases, sellers cannot pay your closing costs. Between Realtor fees and using the proceeds from the sale toward a down payment on their new home, there’s often little left over.

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Rather than let this setback kill the deal, work with the seller to see what they can afford to offer. Determine what you have available for closing, and then ask the seller to pay the difference. For example, if your closing costs total $10,000 and you have $4,000, ask the seller to pay the remaining $6,000.

If you can’t get the seller to pay your closing costs, ask your lender to include all or a portion of the closing costs in your loan. This option is available on FHA and VA loans, but not on conventional loans.

For example, if the seller can only pay a small percentage of your closing costs, your mortgage lender can roll some of the remaining fees into your mortgage. Understand, however, that this method not only increases your loan balance but also your monthly payment.

Final thought

Everyone deserves to have a clear idea of the fees they’ll pay at the close of a home sale. Hopefully, this helps clarify closing costs and gives you the information you need to sell your home with confidence.