Closing Costs: What Are They and How Much Do They Cost?

For anyone getting ready to buy a home, you’ve probably started wondering what expenses might be involved, and the answer is— quite a few. In addition to saving up for your down payment and monthly mortgage payments, you’ll also want to have some cash set aside to pay for closing costs.
Closing costs are one of those things that often get overlooked in the home buying process, but because of how much they can cost, they’re worth knowing about. So what exactly are closing costs and how much should you expect to pay? Here’s everything you need to know about your bill at closing.

What are closing costs?

Closing costs are the fees you’ll pay when closing on a house. Because these fees tend to get lumped together under one umbrella term, it can be hard to understand what you’re paying for. But for most people, closing costs tend to be some combination of fees associated with your property, mortgage, various forms of insurance, and your title. Closing costs typically appear on your loan estimate (that you first receive from a lender when you apply for a mortgage) as well as on your closing disclosure.
We’ll dive into each one of these items in detail, but first, let’s take a look at some numbers to see just how much closing costs end up costing.

How much will I pay in closing costs?

The good news is that no matter how much your house costs, there’s an easy way to estimate your total closing costs. The bad news is that it’s pretty expensive. Generally speaking, closing costs tend to run anywhere from 2% to 5% of the total mortgage amount. This might sound like a relatively small amount, but it adds up quickly when applied to a several-hundred-thousand-dollar mortgage.
Here’s an example of what your closing costs might look like at various mortgage price points.
Mortgage amountClosing costs (2%)Closing costs (5%)
Considering that the median purchase price of homes in 2020 was $346,000), these numbers represent two very likely scenarios. In the first, you’d make roughly a 10% down payment and owe between $6,000 to $15,000 in closing costs. In the second, you’d make a larger down payment (or buy a less expensive home) and pay between $4,000 to $10,000.

Closing Costs: The Breakdown

Now that you know a bit more about what to expect to pay when it comes to closing fees, let’s dive into what individual fees and expenses go into them.

Property fees

The first group of fees you’ll see in your closing costs are those associated with the purchase of the property itself. Here are the most common ones.
  • Appraisal fee. Your appraisal fee is what you’ll pay your home appraiser when they come out to look at your home. This typically happens once the home is under escrow— meaning that both you and the seller have reached a contractual agreement for you to buy the home. Having a home appraised is standard practice, and required by most mortgage lenders to ensure the home is worth (or roughly worth) the cost of the mortgage. Homebuyers are generally responsible for paying appraisal fees, which typically cost around $400.
  • Home inspection fee. Home inspections are another fee that’s typically paid by the home buyer, and with good reason. Since you’ll want to be the one choosing who you hire to inspect your home for issues before you buy it, that also means you’ll be the one paying them the home inspection fee. Home inspections cost the average homeowner $400.
  • Property taxes. Property taxes are one of those things that can vary in cost dramatically based on where you live and the property you buy. The important thing to note about property taxes is that you will most certainly pay them, and you might even have to pay several months’ worth in advance at the time of your buyer’s closing meeting. Once your mortgage is in place, your lender will likely open up an escrow account for you, which will automatically deduct a portion of your monthly mortgage payments to cover property taxes and insurance premiums. To learn more about the property taxes in your area, contact your real estate agent or local assessor’s office.
  • Homeowners insurance premium. If you’re becoming a homeowner, you'll likely want to take out a homeowners insurance policy. Not only will this protect your home in the event of an accident or disaster, but it may also be required by your lender to be approved for your mortgage.
  • HOA fees. When you buy a home that resides within a homeowners association (HOA) then you may be required to pay some of your HOA fees upfront at closing. HOA fees vary widely, so it helps to talk to your real estate agent to get a better idea of what to expect for a given neighborhood.

Loan fees

Another type of fee you’ll find hidden among your closing costs are the ones involved in the cost of finding and generating your mortgage. Here are the main ones to be aware of.
  • Application fee. Loan application fees cover the cost of processing your request and any other initial costs in setting up your loan, such as pulling your credit reports or checking your credit score.
  • Loan origination fee. Also known as an “administrative fee” or “underwriting fee”, this charge covers the costs associated with your lender preparing your mortgage. Loan origination fees typically cost between 0.5% – 1% of your mortgage amount. On a home with a $300,000 mortgage, this would be anywhere between $1,500 and $3,000.
  • Attorney fees. If your state requires an attorney to be present at the closing table, then you’ll pay an attorney fee to have them there. As these can vary quite a bit, it’s worth checking with your lender or real estate agent what the local requirements and associated fees are.
  • Prepaid interest. Many lenders charge their borrowers for any interest that accrues between the time of settlement and the first month's due date on your mortgage. Whatever that amount is, it will likely be lumped in with your other closing costs.
  • Mortgage broker fee. If you decide to work with a mortgage broker, they will charge you a commission based on a percentage of your total home loan amount. These typically range between 1% to 2% of the loan but can be as much as 2.75%.
  • Discount points. At some point, your lender may offer you something called discount points, which reduce your interest rates for an upfront cost. Generally, one point equals 1% of the loan amount. These can be worth it if you plan on staying in your home for a long time (and have been offered high interest rates), but otherwise, just tend to add unnecessary expense to your already-expensive closing costs. Keep in mind that you can always refinance your mortgage later on to get more competitive mortgage rates.
  • Special loan fees. If you end up working with a lender on an FHA loan or VA loan, then you may also be required to pay additional fees for those particular loans.

Mortgage insurance fees

For anyone who plans on having less than a 20% down payment, you may be required by your lender to take out something called private mortgage insurance (PMI). If this is the case, you’ll likely find you owe a few additional administrative fees like your mortgage insurance application fee and mortgage insurance premium fee.

Title fees

A title is a document that signifies your ownership of the property, and you’d better believe it comes with a few administrative fees generated by the title company — mainly the lender’s title insurance fee ($550 on average) and the title search fee (between $75-$200 on average) plus any additional recording fees. Both will be included in your closing costs.

How can I calculate closing costs?

With all these percentages and variables in mind, you’re probably wondering how to go about calculating your closing costs. Fortunately, you can always fall back on those averages I mentioned above, and plan on spending anywhere from 2% to 5% of your total mortgage amount in closing costs.
Keep in mind that your mortgage amount won’t necessarily be the exact sales price of the house you buy. Assuming you’re able to pay the recommended 20% in down payment and avoid additional fees from private mortgage insurance, your total mortgage would only be 80% of the house listing price.
If you have a house listing price in mind, calculating your closing costs is easy. If not, you can always come up with an estimated amount by working backward. Start by coming up with your home-buying budget. Once you know roughly how much house you can afford, deduct whatever you plan to put for a down payment, and you’ll have your remaining mortgage loan balance from which to calculate your estimated closing costs.
While it might sound crazy to go through the headache of crunching these numbers in advance, it can be helpful to know how much money you’ll need at the closing table. Just be sure to plan on paying the higher end of the range (5% rather than 2%) when saving up. This ensures that you won’t come up short-handed — plus, anything leftover can just become a savings bonus for other first-time home buyer expenses.

The bottom line

Closing costs are a pretty major expense when it comes to financing a home, and you’ll want to be sure you have a plan in place to afford them. However you choose to look ahead at this all-important expense, just be sure you start saving well enough in advance. That way, you’ll be prepared for the final bill whenever you arrive at the closing table.

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