What Are Closing Costs and How Much Will I Pay?

Closing costs, or settlement fees, are among the last expenses you pay before officially taking ownership of a home. Read on to learn what you should be prepared to pay when you purchase your next home.

What are closing costs?

Closing costs are fees charged by your lender, real estate agent and other third parties involved in the homebuying transaction. The fees include various charges related to:

• Property expenses.
• The mortgage application process.
• Other paperwork.

As the homebuyer, you typically pay most of the closing costs. However, the seller usually pays real estate agent commissions and transfer fees.

You may be able to negotiate, as part of your offer, to have the seller cover certain fees. You’ll want to work with you real estate agent to write a strong offer and negotiate on terms.

How much will I pay in total?

Closing costs vary greatly depending on your location and the price of your home. Typically, you should be prepared to pay between 2% and 5% of the home purchase price in closing fees.

What costs are included?

When buying a home, closing costs include a combination of one-time fees and initial installments of recurring costs. Many of these fees are variable and may differ based on the location, size and cost of the property you’re buying.  

Here’s what you can expect to pay for each.

One-Time Fees

Application fee: An application fee is a one-time charge by lenders for submitting a loan application. Not every lender charges this fee, but it is usually paid when you apply and is often nonrefundable.

Credit report fees: This fee covers the cost of making copies of your credit report to assess your mortgage loan application. Your credit score, included in your credit report, is one of the most important factors in determining the interest rate offered to you.

Loan origination fee: The loan origination fee is charged by your lender in exchange for processing your loan. It is typically between 0.5% and 1% of the total loan amount, which means it may cost several thousand dollars. The origination fee may also include underwriting costs; if not, you may pay an additional fee for your loan to be underwritten.

Government recording costs: This fee covers the required registration of the property under your name on your deed, mortgage and any other official documents related to your home loan. It is assessed by state and local government agencies and can vary by agency.

Appraisal fees: This fee is paid to the professional who assesses the value of the purchased home. The average appraisal cost can vary depending on the size or value of the home.

Home inspection fee: This fee is paid to the inspector who examines the physical structure and condition of the home, and it can vary depending on your geographic location. Getting your home inspected before you close is not required, but it is highly recommended so that you know about any potential issues with your new home before you buy.

Title insurance: This fee is paid to a title company that searches county records to ensure the title to the property is clear and free of any complications, such as pending debts or liens.

Survey fees: This fee is paid to a property surveyor who assesses the property you are buying. The survey identifies the property’s boundaries and helps you learn what you’re allowed to do to the property — in case you plan to build onto the home after you buy it.  

Attorney fees: In many states, an attorney must oversee the closing process, taking the place of an escrow company or other settlement agent. This closing attorney does not represent the buyer or seller, and therefore the cost is typically split between parties.

Initial Installment Payments

Homeowners insurance: Most lenders will require you to pay the first year of your homeowners insurance premium on or before closing day. The average homeowners insurance premium in the United States is $1,784 a year, but your home’s value, location and coverage amount will affect the cost.

Initial escrow payments: The initial escrow payment is money deposited into your escrow account to pay future homeowners insurance and property taxes. Average annual property taxes are $2,471, though taxes vary widely based on state tax rates and median home values.