What are closing costs? (2023)

Plan to spend an additional 2% to 5% to close your home

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A home’s listing price isn’t the only price tag you should be looking at when purchasing a new home. Your budget should also leave room for closing costs, which are the fees and expenses that come with finalizing your mortgage.

These can include costs for things like home inspections, title searches, title insurance, property taxes and more. Typically, closing costs range from 2% to 5% of your home's purchase price. Budget early on in the homebuying process to avoid any financial surprises before the keys are handed over.

Key insights

  • Use the Loan Estimate provided by your lender to calculate closing costs early on.
  • Closing costs include mortgage fees like origination fees, as well as appraisal charges and insurance costs.
  • Closing costs can be negotiated or paid by the seller in some cases.

How closing costs work

Closing costs are a collection of fees and expenses that homebuyers must pay to finalize their mortgage. They're typically paid at the end of the homebuying process — at your closing, when both the buyer and the seller sign legal documents to transfer property ownership. As the buyer, you’ll also sign paperwork to enter into a contractual agreement with your mortgage lender.

Closing costs are mostly made up of lender processing fees and property fees, though they include some other fees, too. They cover services like title searches and home appraisals and can also include property taxes and escrow payments for homeowners insurance premiums.

“Closing costs are dependent on many factors including credit score, how much buying power you need, how much you want to buy down your interest rate and your lender,” said real estate lending expert Michelle Taylor. “A good lender will go over each fee with you and help navigate with you from the time you apply to the closing of your loan.”

» MORE: Mortgage closing costs vs. prepaids: What’s the difference?

Types of closing costs

All closing costs are listed individually on both the Loan Estimate and the Closing Disclosure documents, both of which you’ll receive at different points in the closing process. The closing costs listed usually fall into one of three categories: mortgage fees, property fees and other fees.

The lender may require fees for required services (like appraisals or pulling credit reports). Other services, like a pest inspection, may be performed by any company you choose.

  • Origination fee: The loan origination fee is usually a set percentage of the loan amount, like 0.5%. So, if you have a loan for $400,000, the bank may charge an origination fee of $2,000. If you pay discount points toward closing costs, they’ll be listed here as well. These fees also include application and underwriting charges. The application fee can run as high as $500, and the underwriting fee can cost as much as the loan origination and application fees combined.
  • Credit report fee: This covers the cost of obtaining your credit report and score.
  • Tax monitoring and tax status research fee: This fee pays for services that verify the property tax amount is correct and monitor property tax payments.
  • Title fees: These usually include the insurance binder fee, the lender’s title policy fee, the settlement agent fee and the title search fee. These charges go toward determining whether the home’s title can be successfully transferred from the seller to the buyer.
  • Prepaid interest: This figure represents the amount of interest accrued from the closing date to when the first mortgage payment is due. The buyer is expected to pay this amount at closing.
  • Appraisal: These fees pay for an official determination of the home’s value by a home appraisal company.
  • Flood determination and monitoring fee: This covers the costs of determining whether your home is located in a flood plain.
  • Pest inspection: Pest inspection fees cover inspections for the presence of bugs that may cause damage to the home’s structure (like termites).
  • Survey fee: This covers a survey of the home’s property lines. Some lenders don’t require a survey if one has been completed within the past 10 years.
  • Property taxes: The buyer is responsible for prepaying the property tax from the date of closing until the end of the year. These funds are managed by your lender in an escrow account.
  • Transfer taxes: This tax may be levied by the local government; it’s a tax on the transfer of the home’s title or deed to the buyer’s name.
  • Homeowners association (HOA) fees: If you purchase a home within a homeowners association, you’ll have to pay for any fees upfront at closing. The fees will be prorated for the remainder of the year from the closing date.
  • Homeowners insurance premium: Some lenders require that you prepay the homeowners insurance premium for the rest of the year. These funds are held in an escrow account with your lender.
  • Mortgage insurance: PMI, or private mortgage insurance, is required for borrowers who put less than 20% down on a home on a conventional loan. You may be required to pay this premium upfront at closing. If you have an FHA loan, you will owe an upfront mortgage insurance premium at closing.

» MORE: How much are VA loan closing costs?

How to calculate closing costs

There are two ways to calculate your closing costs. First, you can use a closing cost calculator found on many financial websites. These calculators use local tax and fee data to give you a reasonably accurate estimate.

Another way is to estimate your closing costs with the Loan Estimate document provided by your lender. This estimates the loan amount, interest rate, monthly payment and closing costs in the beginning. When you receive the Closing Disclosure, which finalizes the loan terms, you’ll want to compare the estimated costs with the finalized costs to look for discrepancies (e.g., any new fees listed).

One important figure you’ll need to compare is the “Cash to Close” amount, which is how much you’ll have to pay at closing. Your lender will specify the methods you can use to pay (usually a cashier’s check or wire transfer). Some banks require a few days’ notice before completing a wire transfer, so you’ll want to ensure you’ve accounted for that time.

» MORE: How to negotiate your mortgage closing costs

Who pays closing costs?

The buyer typically pays for the majority of the closing costs; however, there are some expenses the seller may cover (these are called seller concessions). You can also ask for reduced closing costs from your lender or a waived application fee, but you’ll have to make those requests before you find a home and submit an offer — ideally just after you’ve received approval from multiple lenders.

If you do pursue seller concessions, note that there are limits depending on your loan type. Below are seller concession limits based on mortgage type:

Seller concession limits 3% to 9%, depending on down payment amount 6% 4% 6%

How to lower closing costs

“There are many ways to get help with closing costs,” said Taylor. “This includes government-sponsored forgivable down payment assistance programs. Realtors can [also] write offers for a seller credit to go toward that buydown and help with closing costs.” You should pursue these options earlier on in your mortgage process.

If you want the seller to pay for some of the closing costs, you’ll have to negotiate those terms when you present an offer. Your real estate agent can advise you on typical seller concessions and help you hammer out which ones are most likely to be accepted in your situation.

Finally, don’t be afraid to challenge your lender about certain closing costs. Aaron, a reviewer from Florida, said, “I noticed my closing costs were exceptionally high, and when I inquired as to [the] reason why, they were magically able to drop them by $7000 with the same interest rate.”

» MORE: First-time homebuyer benefits

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    Are closing costs included in the mortgage?

    Some lenders allow you to roll the closing costs into your mortgage. However, this means you'll be paying interest on them for the life of the loan, which will cost more in the long run.

    What is a 'no-closing-cost' mortgage?

    A no-closing-cost mortgage is where the lender agrees to waive the closing costs. However, they may charge you a higher interest rate or add the closing costs to the total loan amount.

    Do I pay closing costs if I’m refinancing?

    Yes, you typically have to pay closing costs when refinancing a mortgage. These costs can be paid upfront or potentially rolled into your new loan.

    Bottom line

    Closing costs cover lender and property fees when you purchase real estate. The amount you’ll have to pay in closing costs depends on your lender, location and the type of mortgage. You can expect to receive a Loan Estimate and Closing Disclosure that spell out each of the costs you’re expected to pay with a new mortgage.

    Usually, closing costs amount to about 2% to 5% of the home’s sale price. Buyers can negotiate with sellers to help pay for some of these costs, but there are limits to how much the seller can cover. Also, the seller could have the upper hand at the negotiation table if it’s a seller’s market. Ultimately, you’ll want to draw on the expertise of your real estate agent to decide the best plan of action for you.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. The New York Times, “A Quick Guide to Closing Costs.” Accessed Aug. 24, 2023.
    2. Consumer Financial Protection Bureau, “What is private mortgage insurance?” Accessed Aug. 24, 2023.
    3. National Association of Realtors, “Closing.” Accessed Aug. 24, 2023.
    4. Consumer Financial Protection Bureau, “Can my final mortgage costs increase from what was on my Loan Estimate?” Accessed Aug. 24, 2023.
    5. realtor.com, “The Real Estate Commission: How Much Are Realtor Fees?” Accessed Aug. 24, 2023.
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