Many borrowers overlook closing costs when calculating the cost of buying a house, but these fees can add between 2% and 5% to the total purchase price of a home. Even if you’ve anticipated this extra expense, it’s likely you’ll still have questions as you negotiate the home purchase. Here, we break down how closing costs work and how much you can expect to pay.
What are closing costs?
Closing costs are fees paid at the end of the homebuying process. They’re due at closing, which is the final meeting between buyers, sellers and real estate professionals, when the title is officially signed over to the buyer, making the home purchase official. Closing costs include insurance, appraisal fees, taxes and other fees associated with the purchase of a home. You’ll get an estimate of your closing costs in your Loan Estimate, and the final closing costs are included in your Closing Disclosure.
How much are closing costs on a house?
Closing costs typically range from 2% to 5% of the total home loan amount. In 2019, the average closing cost paid by a homebuyer was $5,749 (including taxes). For a home that costs $285,000 with 20% down, typical closing costs would fall around $7,000. Where you live can also greatly affect your closing costs — these costs tend to be higher on the coasts, particularly in East Coast states including New York, Delaware and the District of Columbia.
Use the chart below to explore the average closing costs by region for the same $285,000 house.
|Metro||Estimated Closing Cost|
|Minneapolis-St. Paul, Minnesota||$6,668|
|Buffalo, New York||$10,351|
|District of Columbia||$10,448|
How to calculate closing costs
To calculate closing costs, you can estimate 2% to 5% of the total amount you plan to finance. For example, with a loan of $200,000, you could estimate closing costs between $4,000 and $10,000.
To get a more accurate estimate, request a Loan Estimate document from your potential lender. This document provides a breakdown of fees and estimated closing costs for your mortgage.
Closing cost fees
As a general rule, buyers pay the following fees at closing:
- Appraisals, inspections and surveys: The buyer covers the cost of any inspections or appraisal fees on the property to confirm the value of the home and its condition. This typically amounts to $300 to $1,000, depending on which services your mortgage lender requires.
- Loan fees: You’ll pay any fees associated with your loan, including application fees, credit report fees, loan origination fees, attorney’s fees, assumption fees and prepaid interest. If you choose to pay discount points to lower your interest rate, this will also be included in your closing costs.
- Insurance: You’ll pay for private mortgage insurance if you make a down payment of less than 20%, and you’ll also have to pay upfront for the first year of homeowners insurance.
- Title fees: Closing costs include title search fees of around $200, as well as title insurance for both the lender and the buyer. Title insurance ranges from 0.5% to 1% of the purchase price.
- Other fees: There’s a wide variety of other fees associated with closing. Courier fees, HOA fees, recording fees and other expenses could show up on your Closing Disclosure — be sure to review this document carefully at closing to ensure you’re aware and approve of all fees required.
How to reduce closing costs
Closing costs are a standard part of the homebuying process; however, with some thoughtful planning and negotiation, you can greatly reduce or eliminate your closing costs.
- Compare fees between lenders: When you’re shopping for a mortgage lender, don’t be afraid to ask for quotes or estimates on closing costs and other fees associated with the transaction. When you get your list of closing costs, go over it with your lender and ensure you understand everything listed. Ask what wiggle room, if any, is available. Don’t forget to compare costs during other parts of the closing process — like inspections. Don’t feel obligated to use a service provider recommended by your lender or real estate agent if you think you can get a lower price and trustworthy service through another provider.
- Negotiate fees with the seller: A motivated seller is often willing to negotiate on closing costs. With the right negotiation, you might be able to get the seller to pay for some or all of your closing costs. This is a common tactic in a buyer’s market.
- Schedule your closing date wisely: As part of closing, you’ll pay prorated interest for each day between the date of your closing and the start of the first full month when your mortgage payment is due. This means if you close early in the month, you’ll be stuck paying a much larger interest fee at closing than you would closing toward the end of the month.
Who pays closing costs?
As a general rule, both buyers and sellers pay closing costs, though the exact breakdown depends on what’s negotiated between the parties:
- Buyer’s closing costs: Buyers pay fees related to their loan, credit report, title search, lender’s title insurance, homeowners insurance, inspections, appraisals, surveys, settlements and attorney fees.
- Seller’s closing costs: Sellers typically pay the real estate agent’s commission, buyer’s title insurance, mortgage prepayment penalties, any outstanding debts on the property, their attorney fees, transfer taxes and recording fees.
However, over the course of negotiation, the seller may agree to cover some or all of the closing costs. This is generally done to incentivize buyers to purchase slow-moving homes or when the seller is motivated to sell quickly. If you’re buying a home, you can also ask the seller to cover closing costs as an alternative to lowering the sale price. Sellers will be especially motivated to accept this offer if you agree to a quick close and make fewer demands for repairs or changes to the home.
How does closing on a house work?
Closing is the final step of buying or selling your home, occurring between 30 and 45 days after an offer is made. During this meeting, the buyer and seller meet with their respective real estate agents to finalize the sale. This meeting involves the signing of official documents, which then are sent to the closing agent. In many instances, the buyer and seller meet together for closing, but they may also be represented by their real estate agent or a third party.
If the meeting is in person (at a real estate agent’s office or another location) rather than virtual, closing includes signing all the necessary paperwork to transfer the property from the seller to the buyer. The buyer and seller should come prepared with photo ID, their real estate agent or lawyer, the purchase agreement, proof of homeowners insurance and a certified or cashier’s check for out-of-pocket payment.
Closing documents are prepared by the closing agent, title company, lending company and attorneys if their services are required. Both parties can review the terms of the arrangement, including a Closing Disclosure, which covers all closing costs for both the buyer and seller. Both parties then sign all documents, after which the seller is paid and the buyer gets keys to the home. This is typically a brief meeting lasting only a few minutes, but it can last up to several hours if it’s complicated or if lawyers are involved.
Closing cost FAQ
- Are closing costs deductible?
- Some closing costs can be deducted from your taxes, either in the year you pay them, over the life of the loan or when you sell the home. In the year of the home’s purchase, you can deduct loan origination fees, mortgage points paid on cash-out refinances, mortgage insurance and FHA or VA fees. Over the life of the loan, you can deduct a portion of the points paid for new home and refinance loans. When you sell your home, you can deduct title insurance, property taxes, title fees, recording fees, survey fees, transfer tax and distressed property expenses.
Keep in mind there may be other stipulations regarding how and when you can deduct certain fees. Ask your tax preparer, lender or other financial advisors which fees you can deduct from your taxes.
- Do I have to pay closing costs?
- Closing costs are a standard part of the homebuying process. In some situations, you can have a seller agree to pay closing costs on your behalf.
- Can you negotiate closing costs?
- You can negotiate some closing costs, such as the application or processing fees, with your lender. You can also shop around to find the most affordable options for title searches, appraisals, inspections and title insurance. You can also negotiate with the seller to arrange that they pay for some of or all of your closing costs.
- Does the seller pay closing costs?
- Yes, sellers are responsible for their own set of closing costs during the closing process. These are separate from a buyer’s closing costs.
- How do you get sellers to pay closing costs?
- To incentivize a seller to accept responsibility for your closing costs, you should limit other demands as much as possible. For example, if you request multiple repairs or a significant reduction in the home’s purchase price, the seller might not be inclined to accept the additional expense of your closing fees. Make an offer as close to the seller’s asking price as possible for the best chance of success.
- Is it OK to ask a seller to pay closing costs?
- Yes, it’s fairly standard for buyers to ask sellers to pay closing costs. This is done as an alternative to lowering the home’s purchase price or making repairs or upgrades on the home. Sellers who want to expedite the closing process or guarantee a sale often agree to this arrangement.
- Can closing costs go into a mortgage?
- If you’re refinancing your home, your lender likely will let you roll the closing costs into the total mortgage. For new home purchases, this isn’t always an option. Lenders will consider the home’s loan-to-value (LTV) ratio and your debt-to-income (DTI) ratio before letting you include closing costs in the mortgage. In some instances, your lender might increase your mortgage’s interest rate in exchange for a reduction of closing costs.
If your lender does let you roll closing costs into your mortgage, you won’t be expected to pay the lump sum on closing day, but this also means you’ll be paying interest on the closing costs over the life of the loan, which is typically 15 to 30 years — so you’ll pay a lot more in closing overall with this method.
- Are there FHA closing costs?
- Yes, an FHA mortgage has the same closing costs as a conventional home loan. In some cases, you might have to pay a few different fees. For example, a home appraisal is typically required for an FHA mortgage approval but may not be required for all conventional loans.
- What are closing cost credits?
- Closing cost credits are credits from the seller that go toward the cost of home repairs. With these credits, your total closing costs decrease — the seller grants you money toward closing costs to allot for repairs you both agree need to be made to the home after the sale.
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