Buying a home is one of the most exciting — and expensive and nerve-wracking — purchases you’ll ever make. You see the prices listed for each home, but beyond the sale price of the house itself, there’s another part of the process that can catch many first-time or first-time-in-a-long-time buyers off guard: closing costs.
Closing costs can add thousands of dollars to the total amount you need to bring to the table when closing your loan, and understanding them is a big part of not ending up paying more than you can afford to. Whether you’re a first-time buyer or getting back into the market for the first time in a while, here’s what you need to know about what you’ll typically pay in closing costs — and why.
What Are Closing Costs?
Closing costs are the fees and expenses associated with finalizing your home purchase, and cover a number of topics and service providers surrounding your loan. They are typically paid at the time of closing — the point at which the title of the property officially transfers from seller to buyer. With some specific loans, closing costs can be rolled into the overall loan. If you’re taking out a loan to purchase your home, it’s always smart to discuss this with more than one lender to see how they approach and cover closing costs.
These costs are separate from your down payment and typically range between 2% and 5% of the home’s purchase price. That would mean on a $400,000 home, a person could be paying anywhere from $8,000 to $20,000 in closing costs. That sizable gap is another reason why it’s important to consult with multiple lenders to find the loan that best suits your needs and abilities.
Who Pays Closing Costs?
While both buyers and sellers have closing costs, the bulk of the fees typically fall on the buyer. In some situations — such as competitive buyer markets — sellers may agree to cover a portion of the buyer’s closing costs to help seal the deal.
It’s wise for buyers to budget for their full share of costs, even if the ends up that some are negotiated away/defrayed later.
Common Closing Costs Explained
Here’s a breakdown of the most common fees buyers encounter at closing:
1. Loan Origination Fees
These are charged by your lender for processing your mortgage application. This can include underwriting, document preparation, and administrative costs. It’s usually around 0.5% to 1% of your loan amount.
2. Appraisal Fee
Your lender will require an appraisal to determine the market value of the home, ensuring it matches or exceeds the loan amount. Expect to pay between $300 and $600 for this service, with even higher prices in some competitive markets.
3. Credit Report Fee
Your lender will pull your credit report as part of the loan approval process. This typically costs between $30 and $50, but can also vary by lender and region.
4. Title Search and Title Insurance
Before the sale can go through, a title company will check the property’s ownership history to ensure there are no legal issues (like liens or ownership disputes). You’ll also be required to purchase lender’s title insurance to protect the bank’s investment. Optional owner’s title insurance is also available to protect your own financial stake.
Combined, these costs can often run anywhere from $500 to $2,000 or more depending on the location and property.
5. Escrow Fees
An escrow company or attorney manages the funds and paperwork between buyer and seller. Fees for escrow services are often split but vary widely — $500 to $2,000 is typical, with prices even higher in some areas.
6. Prepaid Property Taxes and Homeowners Insurance
You may need to prepay certain expenses for your new home. This includes property taxes, homeowner’s insurance premiums, and possibly mortgage insurance if your down payment is less than 20% of the loan.
These prepaid costs ensure your lender’s investment is protected and that taxes and insurance are in place from day one.
7. Recording Fees
Your local government charges a fee to record the sale and transfer of ownership in public records. This is usually a few hundred dollars, depending on your location.
8. Attorney Fees (if applicable)
In some states, attorney involvement in the closing process is required. Even when not required, some buyers choose to hire a real estate attorney for peace of mind. Fees can range from $500 to over $1,500. It’s also wise to consult with more than one attorney to find a good fit, if you wish to engage these services or your state obligates you to do so.
9. Home Inspection (optional but recommended)
While not always considered a closing cost (because it’s paid earlier in the process), a home inspection is critical. It helps identify potential issues with the home before finalizing the sale. Expect to pay $300 to $500, with fees ranging even higher in competitive areas.
How to Prepare for Closing Costs
Get an Early Estimate
When you apply for a mortgage, your lender must provide a Loan Estimate within three business days. This document outlines the expected closing costs.
Closer to your closing date, you’ll receive a Closing Disclosure — a finalized statement showing the actual amounts you’ll owe. Compare the two and ask your lender to explain any changes.
Shop Around
Some closing costs — like title insurance, inspections, and attorney fees — can be shopped for. You’re not obligated to use your lender’s recommended vendors, and getting multiple quotes can save you hundreds. Just like it’s smart to shop for the right lender, it’s also smart to find vendors in each citation you are able to best suit your individual needs. It’s a little extra legwork that can have a huge payoff for you in terms of costs and ease of the process.
Ask About Seller Contributions
Especially in buyer-friendly markets, you may be able to negotiate that the seller covers a portion of your closing costs. This is sometimes referred to as a seller concession and can be part of your purchase agreement.
Can You Roll Closing Costs Into Your Loan?
Yes, in some cases, especially when refinancing, you may be able to roll closing costs into your loan. However, doing so increases your loan balance and total interest over time.
For home purchases, most lenders require you to pay closing costs upfront at the time of closing. Some government-backed loan programs (like VA or FHA loans) may allow limited cost-financing options or offer grants to help.
The Bottom Line
Closing costs are a critical — but often overlooked — part of buying a home. While they can add thousands to your upfront expenses, being prepared and informed can help you budget effectively, avoid surprises, and even save money where possible.
Before you fall in love with a home or sign on the dotted line, take the time to understand not just what you’ll pay for the house — but what you’ll pay to close on it. The more you know, the smoother your path to homeownership will be.
