During the homebuying process, first-time buyers often focus on their down payment, leaving them surprised and unprepared for handling their closing costs.
Closing costs can add several thousands of dollars to a home’s purchase price. Understanding what fees to expect and how to minimize them can help homebuyers budget and prepare strategically.
What are closing costs and when are they paid?
Also called settlement fees, closing costs include multiple charges necessary to transfer a property from a seller to a buyer. These costs vary by transaction and can consist of lender fees, property taxes, homeowners insurance, government fees and charges from third-party service providers.
Closing costs can range between 2% and 6% of a buyer’s loan amount. According to the National Association of Realtors, the median price on an existing home is just over $419,000, meaning a homebuyer taking out a loan in that range can expect to bring between $8,380 and $25,140 to the closing table.
Buyers won’t pay all settlement fees on closing day; some costs, such as charges from third-party service providers, are due before the transaction is complete.
Common closing costs
Multiple factors affect closing costs, including the mortgage type, loan amount, state- and local laws and transaction details. These fees are associated with most purchases:
|
item |
Description |
Average cost |
|
Appraisal fee |
Charges associated with the home appraisal, a professional assessment of the home’s market value. |
$300-$600 |
|
Home inspection |
Charges for a professional evaluation of the home’s physical condition. |
$300-$500+ (Varies by location and property size.) |
|
Lender fees |
Charges associated with initiating and processing the loan. Can include an application fee, origination fee or other charges. |
1%-2% of the loan amount. (Varies by lender. Can also be a flat fee.) |
|
Credit report |
Lenders will typically order a three-bureau credit report. |
$50-$80 |
|
Flood monitoring and flood determination fee |
Charges associated with determining if a property requires flood insurance. |
$15-$25 |
|
Prepaid expenses |
A portion of mortgage interest, property taxes and homeowners insurance paid up front. |
Varies by transaction |
|
Escrow payment |
A portion of annual property taxes and homeowners insurance to establish an escrow account. |
Varies by transaction |
|
Real estate attorney fees |
The cost of hiring an attorney or settlement agent to prepare documents and facilitate the closing. |
Varies by state and lender. Can be a flat fee, hourly rate or a percentage of the home purchase price. |
|
Title search and insurance |
The cost of a title search and title insurance policies to protect the borrower and lender from future title claims. |
0.5%-1% of the purchase price for title insurance policies. |
|
Tax service provider fees |
Charges for tax monitoring and tax status search. |
Varies by transaction |
|
Government recording and transfer fees |
Charges associated with documenting the transaction and transferring the property title. |
$25-$250. Varies by location. |
While settlement fees can vary greatly, a study from Fannie Mae showed that the median closing costs for first-time homebuyers is 2.2% of the home purchase price.
Additional closing costs buyers may pay
Depending on the transaction details, loan type and local laws, borrowers may incur additional closing costs.
- Discount points: Prepaid interest to reduce the mortgage interest rate. (Typically a percentage of the mortgage principal.)
- Government loan fees: FHA, VA or USDA loan borrowers typically pay upfront mortgage insurance or a funding fee at closing. (Ranges from 1% to 3.6% of the mortgage amount depending on the loan type.)
- HOA transfer fees: Charges associated with transferring ownership if the home is governed by a homeowners association (HOA).
- Home warranty: An optional policy to cover repair or replacement costs in the home. (Ranges from $220 to more than $1,800.)
- Pest inspection: Depending on the home’s location, buyers may need a termite or other pest inspection. (Ranges from $50 to $200.)
How to minimize closing costs
While avoiding closing costs altogether may not be possible, homebuyers can take steps to lower the amount they pay out of pocket.
- Negotiate fees. Some settlement charges are negotiable. For example, borrowers can ask third-party service providers, such as home inspectors, closing attorneys or title service providers, for a lower rate. Lenders supply borrowers with a loan estimate, detailing which fees they can shop for, early in the mortgage process.
- Negotiate with the seller. Homebuyers can negotiate with the seller to take on some of the fees, especially in a buyer's market. Most mortgage programs allow sellers to cover up to a certain percentage of a buyer’s closing costs. For example, conventional loans allow sellers to take on up to 3% to 9% of the home purchase price, depending on the buyer’s down payment. FHA loans allow sellers to pay up to 6% of the home’s price.
- Negotiate with the lender. Buyers can ask a lender to reduce some or all of their fees. Additionally, some mortgage lenders may offer no-closing-cost mortgages, covering some of a borrower’s closing costs in exchange for a higher interest rate. This may result in paying much more than the closing costs because the higher rate remains over the life of the loan.
- Make a larger down payment. Closing costs are related to the home purchase price and a borrower’s loan amount. Homebuyers can reduce their closing costs by increasing their down payment.
- Seek closing costs assistance. Some borrowers may qualify for down payment and closing costs assistance programs through state and county governments or local community organizations. Closing cost assistance can be through grants, forgivable loans or deferred second mortgages.
- Use gifted funds. Most mortgage types allow borrowers to use gifted funds from a friend or relative, provided they show a gift letter listing the source of the funds and proof the money is not a loan.
