Closing Costs: A Complete Guide

Part of the home buying process is paying closing costs. These costs are typically paid during the closing process, in addition to your down payment and any other funds promised at closing. Understanding what are closing costs will help you prepare for the homebuying process and save for it if you’re the one responsible for paying them.

What Are Closing Costs?

Closing costs are expenses the home buyer and seller are required to pay in order to finalize the home purchase. These fees cover things like your home appraisal, title insurance and other important fees so you can own the own free and clear. Closing costs don't include your down payment and are typically due on closing day – the day you officially own the home. Home buyers and sellers can also negotiate who is responsible for the fees. Lenders may also impose closing fees when homeowners refinance their mortgage.

Since you may be responsible for paying for them, it’s smart to account for how much closing costs could be so you can start saving now.

How Much Are Closing Costs?

Closing costs can vary between 3% to 6% if the home's purchase price or home loan amount. Ultimately the amount you'll pay will depend on factors like costs imposed by the mortgage lender, title insurance company, home appraisal company, and the home price. Ask your lender and real estate agent what you may be responsible for in closing costs so you can be prepared, and know you may get a more accurate picture of your closing costs once you receive your initial Loan Estimates.

Also, lenders are required to send you a Closing Disclosure 3 business days before your home closing date. This document will outline the final amount you’ll pay in closing costs as a buyer.

Who Pays Closing Costs?

In most cases, the buyer is responsible for most of the closing costs, though who pays what will depend on what the buyer and seller negotiate.

Paid By The Buyer

Some of the closing fees a home buyer may pay include:

• Property taxes: This type of tax is what you’ll need to pay to your local government each year as a homeowner.
• Appraisal fee: As part of lender requirements, you will need to hire a home appraiser to determine the fair market value of the home. Lenders will not loan you more than the fair market value of the home.
• Home inspection: Getting a home inspection helps to assess the condition of the home, and whether it needs repairs or has any other major issues.
• Lender’s title insurance: This type of insurance helps to protect the lender against any issues with the property's title.
• Application fee: Lenders may charge you a fee to apply for a mortgage.
• Courier fee: If you or the lender need to mail documentation to finalize the home purchase, you’ll be responsible for courier fees.
• Loan origination fee: Lenders typically change an origination fee to process the loan for the borrower.
• Processing and underwriting fees: Some lenders may charge a separate fee to process documentation to underwrite your mortgage.
• Credit report fee: Mortgage lenders tend to include this in the origination fee — you may need to pay for them to get access to your credit report.
• Escrow fees: These fees are part of your overall closing costs, and paid to a real estate attorney or escrow company to finalize the transfer of funds to everyone involved in the home purchase.
• Notary fees: You may need have official documentation notarized in order to finalize the mortgage.
• Attorney fees: A real estate attorney may be necessary if you hire someone to help you to finalize the real estate transaction.
• Homeowners insurance: Lenders typically require home buyers to get homeowners insurance when taking out a mortgage. It also helps to protect your home against any damage or theft.
• Mortgage insurance: If you take out an FHA loan, you may have to pay for mortgage insurance upfront, during closing. For those taking out a conventional loan with less than 20% down, your private mortgage insurance payments are part of your mortgage payment.
• Mortgage discount points: This fee is what you pay to the lender in exchange for a lower interest rate. Think of it as an advance payment of interest to hopefully save money throughout the life of the loan.
• Flood insurance: In addition to homeowners insurance, you may want to insure your home against floods. This type of policy may be required if you live in a flood zone or if it is part of your loan terms.

Paid By The Seller

Some fees a seller is responsible for could be:

• Real estate agent commissions: This fee is typically a percentage of the home’s purchase price.
• Owner’s title insurance: Purchasing owner's title insurance will protect you if someone says they have a claim against the home and sues you.
• Transfer taxes: This tax is a one-time fee you pay when the property transfers ownership.

How To Calculate Closing Costs

While you may not know exactly how much you’ll pay in closing costs until you start finalizing the real estate transaction, you can estimate the amount. You can also talk to your real estate agent to see what typical costs may be.

To estimate how much you could be paying, look at the home purchase price and estimate that you will pay 3% to 6% of that in closing costs. For example, if you’re looking at buying a house for $350,000, you could be paying $10,500 to $21,000 in closing costs. Sellers may pay less. Since a large chunk of these could be real estate agent commissions, ask your agent ahead of time how much you could be paying.

Average Closing Costs: State By State

The amount you’ll pay in closing costs is dependent on where you’re purchasing a home. According to ClosingCorp, a mortgage technology company, the average closing costs by state was as follows in 2022:

How To Lower Your Closing Costs

The closing costs on a house may seem steep. To save some money, there are a few ways you can lower closing costs.  

Seller Concessions

Seller concessions are when a home seller agrees to pay for part of the closing costs for the buyer. A seller may agree to paying closing fees because they want to sell the house faster. It could be that the seller needs to move quickly, or the home has been on the market for a long period of time.

Unfortunately, the seller won’t be able to pay for all the closing costs since mortgage lenders place limits on how much the seller can contribute. In most cases, lenders allow seller concessions for up to 3% of the total loan amount, assuming the buyer is purchasing a primary residence. Before asking for concessions, consult your real estate agent to see what the limits may be, and whether the seller may be motivated to sell and agree to them.

Lender Credits

You may be able to convince your lender to cover some of the closing costs, or waive some of them for you. In exchange for the privilege, you will most likely need to accept a higher interest rate on your mortgage. Remember, lenders won't cover your down payment, so you'll still need to find a way to cover that. Plus, you may save on some closing costs now, but you could pay more in interest throughout the life of the loan. The interest charges could be more than what you would have paid in closing fees in the first place.

FAQs About Closing Costs

Here are some answers to the most common questions home buyers may have about closing costs.

Which closing costs are tax deductible?

The majority of closing costs are not tax deductible, but a few may qualify, including payments toward property taxes, mortgage interest and buying points. However, it could depend on whether you itemize your deductions. It's best to speak to a tax professional for more guidance.

What is an example of a closing cost?

An example of a closing cost is the appraisal fee, where a home appraiser assesses the fair market value of the home you’re looking to purchase. Other examples of closing costs include origination fees, real estate commissions, and home inspection fees.

How can I avoid closing costs?

The truth is that you likely won’t be able to avoid closing costs entirely. However, you may be able to lower the amount you pay overall by shopping around for home inspectors, title companies and home appraisers. You may also be able to negotiate for seller concessions — where the seller covers part of the closing costs — and work with lenders to have them cover some of the closing costs. If you choose the latter option, you may have to agree to a higher mortgage interest rate.

Can you negotiate closing costs?

Yes, you may be able to negotiate closing costs, depending on the state of the market you’re buying in. Ask your real estate agent for advice on negotiating.

Can closing costs change?

Yes, closing costs can change. Fees that can fluctuate include ones provided by third parties like title insurance and appraisals as it will depend on who you or the lender chooses. However, some will most likely stay the same, such as origination and underwriting fees from your lender.

The Bottom Line

Closing costs are costs you need to pay when you close on a home as a seller or home buyer. Some fees you may pay include expenses like title insurance, origination fees, and real estate agent commissions. Knowing what closing costs are can help you prepare for the expenses as they arise.

Though it could be less than the typical 3% to 6% of the home purchase price or loan amount, it’s better to err on the side of caution and save more, instead of scrambling at the last minute if you don’t have enough. To help, consider using apps like Rocket Money^SM to track your spending and find ways to save for your closing costs.