What Are Closing Costs?

Closing costs are the expenses, over and above the property's price, that buyers and sellers usually incur to complete a real estate transaction.

Those costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. The lender is required by law to show these costs in a loan estimate form within three days of a home loan application. Gifts of equity (real-estate sales to a relative or close friend at a below-market price) can also incur some closing costs.

Key Takeaways

  • Closing costs are fees due at the closing of a real estate transaction in addition to the property's purchase price. Both buyers and sellers may be subject to closing costs.
  • Examples of common closing costs include fees related to the origination and underwriting of a mortgage, real estate commissions, taxes, insurance, and record filing.
  • Closing costs must be disclosed by law to buyers and sellers and agreed upon before a real estate deal can be completed.

How Much Are Closing Costs?

Closing costs occur when the title of a property is transferred from the seller to a buyer. The total dollar amount of closing costs can vary by location and the value of the property. As a general rule, home buyers typically pay between 2% and 5% of the purchase price in closing costs. 

The nationwide average closing costs for a single-family property in 2020 were $6,087 including taxes, and $3,470 excluding taxes, according to a survey by ClosingCorp, a data firm that specializes in these costs.

The survey found the highest average closing costs, including taxes, were in these locations:

  • The District of Columbia ($29,329)
  • Delaware ($17,727)
  • New York ($13,261)
  • Maryland ($11,709)
  • Washington ($11,513)

The states with the lowest average closing costs, including taxes, were: 

  • Missouri ($1,571)
  • Indiana ($2,100)
  • Kentucky ($2,229)
  • Iowa ($2,272)
  • South Dakota ($2,276)

Laws require lenders to provide a loan estimate that discloses the closing costs on the transaction. Under the federal Real Estate Settlement Procedures Act (RESPA), they must provide this information within three days of taking the borrower's loan application. At least three days before the closing, the lender must also provide a closing disclosure statement outlining all closing fees. The listed fees may have changed from the loan estimate.

What Do Closing Costs Include?

All of the closing costs will be itemized on the loan estimate and closing disclosure. Here are the standard fees you can often expect to see:

Application Fee

This is a fee charged by the lender to process your mortgage application. Ask the lender for details before applying for a mortgage.

Attorney Fee

This is a fee charged by a real estate attorney to prepare and review home purchase agreements and contracts. Not all states require an attorney to handle a real estate transaction.

Closing Fee

Also known as an "escrow fee," this one goes to the party that handles the closing: the title company, escrow company, or an attorney, depending on state law.

Courier Fee

If you’re signing paper documents, this fee helps expedite their transportation. If the closing is done digitally, you might not pay this fee.

Credit Report Fee

A charge ($15 to $30) from a lender to pull your credit reports from the three major credit bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.

Escrow Deposit

Some lenders require you to deposit two months of property tax and mortgage insurance payments into an escrow account at closing.

FHA Mortgage Insurance Premium

FHA loans, if you have one, require an upfront mortgage insurance premium (UPMIP) of 1.75% of the base loan amount to be paid at closing (or it can be rolled into your mortgage). There's also an annual MIP payment due monthly that can range from 0.45% to 1.05%, depending on your loan's term and base amount.

Flood Determination and Monitoring Fee

This is a fee paid to a certified flood inspector. The inspector's job is to determine whether the property is in a flood zone and requires flood insurance (separate from your homeowners insurance policy). Part of the fee includes ongoing observation to monitor changes in the property's flood status.

Homeowners' Association Transfer Fee

If you buy a condominium, townhouse, or property in a planned development, you may be required join that community's homeowners' association (HOA). This is the fee that covers the costs of switching ownership, such as updating documents. Whether the seller or buyer pays the fee may not be spelled out in the contract, so you should check in advance. The seller should provide  documentation showing HOA dues amounts and a copy of the HOA's financial statements, notices, and minutes.

Homeowners Insurance

A lender usually requires evidence that you've paid your first year’s homeowners insurance premium at closing.

Lead-Based Paint Inspection

This is a fee paid to a certified inspector to determine if the property has hazardous, lead-based paint.

Lender's Title Insurance

An upfront, one-time fee paid to the title company protects the lender if an ownership dispute or lien arises that it didn’t find in the title search.

Origination Fee

This charge covers the lender’s administrative costs to process your mortgage and is typically 1% of the loan amount. Some lenders do not charge origination fees but instead charge a higher interest rate to cover those costs.

Owner's Title Insurance

This policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts.

Pest Inspection

This is a fee covering the cost of a professional pest inspection for termites, dry rot, or similar damage. Some states and some government-insured loans require an inspection.

Points

Points (or "discount points") are an optional, upfront payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount. At a time when mortgage interest rates are already low, paying points might not save you much money.

Prepaid Daily Interest Charges

A payment to cover any interest that will accrue on your mortgage from the date of closing until the date of your first mortgage payment.

Private Mortgage Insurance (PMI)

If your down payment is less than 20%, your lender might require that you take out private mortgage insurance (PMI). You might also be required to make the first month’s PMI payment at closing.

Property Appraisal Fee

This is a required fee paid to a professional property appraisal company to assess the home's fair market value and determine your loan-to-value (LTV) ratio.

Property Tax

At closing, expect to pay any local property taxes due within 60 days of the home purchase.

Rate Lock Fee

This is an optional fee charged by the lender for guaranteeing you a specific interest rate for a limited period, typically from the time you receive a preapproval until closing. A rate lock protects you against a sudden rise in interest rates.

Recording Fee

This is a fee charged by your local recording office, usually city or county, for the recording of public land records.

Survey Fee

This is a fee charged by a surveying company to check property lines and shared fences to confirm a property's boundaries.

Tax Monitoring and Tax Status Research Fees

These are third-party fees to keep tabs on your property tax payments and notify your lender of any issues with your property tax payments, such as late or failed payments.

Title Search Fee

Title search fees are fees charged by the title company to analyze public property records. The title company searches those records to ensure that there are no outstanding ownership disputes or liens on the property.

Transfer Tax

This is a tax levied by the state or local government to transfer the title from the seller to the buyer.

Underwriting Fee

An underwriting fee is charged by the lender for verifying your financial information, income, employment, and credit for final loan approval.

VA Funding Fee

If you have a VA Loan, this fee, charged as a percentage of the loan amount, helps offset the program’s costs to U.S. taxpayers. The amount of the fee depends on your military service classification and loan amount; the fee can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.

Real estate commissions represent one of the highest costs at a typical closing. Buyers don’t pay this fee, though; sellers do. Typically, the commission is 5% to 6% of the home’s purchase price, and it's split evenly between the seller's agent and the buyer's agent.

Can You Negotiate Closing Costs?

You may wonder how you can afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. Fortunately, some of them may be negotiable.

For example, if you suspect a lender is adding on unnecessary fees, known as "junk fees," speak up. Ask the lender to remove or reduce fees if you notice duplication. Be especially wary of excessive processing and documentation fees.

Your attorney, if you're using one, should be able to point out any fees that are unnecessary or unusually high.

Other Ways to Reduce Closing Costs

Shop Around

You may be able save some serious cash on closing costs if you compare fees from lender to lender. You also don’t have to use the title company, pest inspector, or home insurer your lender suggests. So it's worth calling around for prices.

Schedule Your Closing at the End of the Month

A closing date near or at the end of the month helps cut down on prepaid daily interest charges. A lender can run this scenario for you to figure out how much you might save.

Ask the Seller for Help

You might be able to get a seller to either lower the purchase price or to cover a portion (or all, if you’re fortunate) of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. In many hot housing markets, though, conditions favor sellers, so you might get pushback or a flat-out "no" in response. But it doesn't hurt to ask.

Compare the Loan Estimate and Closing Disclosure Forms

When you get your initial loan estimate, review it carefully. If you’re unsure about what a fee entails or why you should have to pay it, ask the lender to clarify. If a lender can’t explain a fee or pushes back when queried, consider that a red flag.

Likewise, if you notice new fees or see noticeable increases in certain closing fees, ask your lender to walk you through the details. It’s not uncommon for closing costs to fluctuate from preapproval to closing, but big jumps or surprising additions deserve scrutiny.

Roll Closing Costs into Your Mortgage

In some instances, lenders will offer to pay your closing costs or roll them into your loan as a last resort. When you roll your closing costs into your loan, you will pay more for your mortgage.

Real Estate Commissions

A real estate commission is the fee that sellers owe their broker at the end of the sale. Sellers may be able to negotiate that fee when they put their home on the market.

Special Considerations: Mortgages With No Closing Costs

No-closing-cost mortgages eliminate many but not all fees for the buyer at closing. These mortgages can be helpful in the short term if you're short on cash, but they usually come with higher interest rates. Your lender may also offer to roll your closing costs into the mortgage, but that means you'll owe more on the loan and have to pay interest on those closing costs over time.