What Are Closing Costs and How Much Are They?
5 Min Read | Published: May 29, 2024
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Typically, closing costs range from 2% to 5% of the loan. They include appraisal fees, title insurance, attorney fees, home insurance, and more.
At-A-Glance
- Homebuyers generally must pay closing costs to finalize a real estate purchase.
- Common closing costs include loan origination, title, and appraisal fees.
- Closing costs may sometimes be negotiable.
Homebuyers may be surprised to learn that the cost of buying a home extends beyond just the purchase price. Closing costs are a significant part of the home-buying process, but many buyers and sellers alike are unsure of what they entail.
In this article, we’ll break down the different types of closing costs, including origination fees, title insurance, and escrow fees, helping you to budget effectively when buying (or in some cases, refinancing) a home. We’ll also look at tips for saving money on closing costs.
What Are Closing Costs?
Closing costs are the various expenses buyers and sellers are required to pay to complete a real estate transaction. Common closing costs include loan origination fees, home inspection fees, appraisal fees, and title insurance.1 While both buyers and sellers may have closing costs, many closing costs fall on the buyer.
How Much Are Closing Costs?
Determining your closing costs is an important step in the home-buying process.
Closing costs depend on various factors, such as location, loan type, and home value, but generally range between 2% to 5% of the loan.2
This means if your mortgage is $300,000, closing costs could end up costing $6,000 to $15,000, but this will vary depending on a number of factors, including what state you’re in.
How to Reduce Closing Costs
Closing costs can add up quickly, but the good news is that there are a few ways to potentially reduce them. Depending on the housing market, you may be able to negotiate with the seller to cover some of the closing costs. In a slower housing market, sellers may offer to cover some closing costs to attract buyers. You may also be able to negotiate certain fees with your lender, such as application, origination, and credit check fees.
Additionally, some banks may have rebates for eligible borrowers which could help to reduce some of your closing costs. It’s important to ask your mortgage lender about these to see if it’s something that they offer.
What Closing Costs Does a Buyer Pay?
Many closing costs are paid by the buyer in a real estate transaction, which may include:
- Origination fees
These are one-time set-up fees charged by your mortgage lender to process your application and fund your loan. Origination fees typically cost between .5% and 1% of the loan amount.3
- Appraisal fees
Appraisal fees cover the cost of hiring a professional to assess the home to determine its market value.
- Discount points
Discount points, also known as mortgage points, are optional fees you can pay when taking out a mortgage. While they can reduce your mortgage interest rate, they can also result in higher upfront costs. One point typically costs 1% of the loan amount.
- Escrow fees
Buyers may need to contribute to an escrow account for certain closing expenses, which may include property taxes and homeowners insurance premiums.
- Home insurance
You may need to show proof of home insurance as part of the closing process. Homeowners insurance premiums can typically be paid directly to the insurance company or through your escrow account.
- Property tax
When you close on a home, you may need to pay a certain amount of your property taxes up front.
- Title insurance
Lenders may require you to buy title insurance to make sure there aren’t any outstanding liens or other title issues with the property.
- Mortgage insurance
If your down payment is less than 20%, you may need to pay for private mortgage insurance (PMI), which protects the lender in the event you default on the loan.
- Attorney fees
Some states require you to involve an attorney in your real estate transaction. The cost to hire an attorney varies, depending on your location and other factors.
Did you know?
Some lenders require a pest inspection to ensure the property is free of termites and other pests that could damage the home. This is another example of a closing cost that a buyer may be required to pay.
Frequently Asked Questions
Some closing costs may be negotiable. One way to lower your closing costs is to negotiate seller concessions. Seller concessions may result in the seller covering specific closing costs for the buyer, such as appraisal, title, and home inspection fees.4 Buyers may also be able to negotiate the closing costs charged by their lender, such as loan application and origination fees.
Seller closing costs vary depending on the housing market, purchase price, and the agreement with the buyer. Closing costs for sellers may include real estate agent commissions, unpaid property taxes, and transfer taxes.
Closing costs can sometimes be included or “rolled” into a mortgage loan. For example, some lenders provide no-closing-cost mortgages, where you don’t have to pay closing costs up front. Instead, the costs may be added to your loan balance or reflected in the form of a higher interest rate. This will depend on various factors, such as your lender and loan type.
The Takeaway
Closing costs can represent a significant expense for buyers, and sometimes sellers, in a real estate transaction. Becoming familiar with the various types of closing costs can help to ensure your financial preparedness for the sale and empower you to navigate the entire process with confidence.
1 “Common closing costs for buyers,” National Association of Realtors
2 “Closing costs: What are they and how much are they?,” Bankrate
3 “Upfront cost of buying a home,” National Association of Realtors
4 “Seller concessions: A guide for REALTORS®,” National Association of Realtors
Theresa Stevens is a personal finance writer based in Boston, Massachusetts. Her work has been featured in Forbes Advisor, Bankrate, USA TODAY Blueprint and more.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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