Closing Costs: What You’ll Pay and Why

Written by Elizabeth BoydSeptember 14th, 202212 minute read

Closing costs are part of the deal when you purchase or refinance a home, but they are charged in addition to your home’s purchase price. Closing costs vary by state, but budget for about 3–5% of your home’s purchase price if you’re the buyer and 1–3% if you’re the seller. (Those percentage estimates don’t include realtor commission, which is typically 5–6% of the home’s purchase price and covered by the seller at closing.)

These costs include the fees that your mortgage lender, appraiser, and others charge for helping you with your home purchase. Loan origination fees, appraisal costs, and property taxes are just a few examples of some common closing costs. These costs add up quickly, so it’s important to plan accordingly and explore options for saving on closing costs.

»SAVE: How to get a home buyer rebate and save on closing costs

Jump to section: Buyer vs. seller closing costs | 💰How to save on closing costs | Closing cost fee glossary | FAQ about closing costs

Who pays closing cost?

Buyers typically pay most of the closing costs in a real estate transaction, unless they’ve negotiated with the seller to cover their closing costs. Buyers usually pay closing costs because the lender-related requirements represent the bulk of those expenses. However, sellers must pay some closing costs too. The biggest seller closing costs are real estate agent commissions.

Buyer closing costs vs. seller closing costs

Buyer closing costs (3–5% of home’s purchase price)
Seller closing costs (1–3% of home’s selling price)
Loan origination fee (1% of the loan)
Real estate commissions
Title search and insurance
Title insurance
Prepaid property taxes
Prorated property taxes
Homeowners insurance
Transfer taxes and recording fees
Discount points
Notary and courier fees
Appraisal fee
HOA transfer fees
Upfront mortgage insurance

Credit report fees

Escrow fee

Inspection report fees

Who pays which closing costs varies from state to state and even county to county. Take California, for example. The payment of the documentary transfer tax is made by the seller in southern California. In northern California, the buyer pays. And in central California, it can be a combination of both.

Shop around for a mortgage:

🏡 Lenders will charge different closing costs, so compare several loans before you commit. One way to compare closing costs across lenders is to look at the annual percentage rate (APR). Just be sure you’re comparing loans that are structured the same. Comparing the APR of an adjustable-rate mortgage to a fixed-rate mortgage won’t be a one-to-one comparison.

How to save money on closing costs

  1. Compare loans from multiple lenders.
  2. Research down payment assistance options.
  3. Negotiate seller concessions.
  4. Get cash back from a buyer rebate program.

The best way to save money on closing costs is to compare rates, fees, and terms from multiple lenders. You may be able to save some money by choosing your own providers for title searches and other services. But there’s a considerable time investment in finding providers and comparing their fees, so the savings might not be worth it for you.

Buyers should also research available down payment assistance programs and grants to free up more cash for closing costs. Rolling your closing costs into your loan is also possible with some lenders, but we don’t recommend it. It will cost you a lot more in the long run since you’ll be paying interest on your closing costs.

Depending on the market, you may be able to negotiate seller concessions to help with closing costs. But that’s less likely in a hot seller’s market.

One easy way to get help with closing costs is to see if you qualify for a home buyer rebate. We recommend the Clever Cash Back buyer rebate program. If you live in a qualifying state, you’ll get up to 0.5% of your home’s purchase price back in your pocket after closing in cash. It’s a cost-effective way to reimburse yourself part of your closing costs—or fund your first home improvement project.

How much are closing costs for buyers?

Closing costs for buyers are about 3–5% of the loan amount on average. However, your exact total will depend on several factors, including the following:

  • Home price
  • Location
  • Type of loan
  • Type of occupancy
  • Credit score
  • Method of payment (cash vs. mortgage)

Unfortunately, most first-time homebuyers don’t realize how much they’ll pay in closing costs and plan only for the down payment. A good strategy is to budget for the high end (5% of the loan). That gives you a general idea of how much you will need to bring to closing with your down payment. Some lenders will offer to lump the closing costs into the loan, but avoid this if you can. You’ll be paying interest on those closing costs throughout your entire mortgage.

»LEARN: Federal grants for first-time home buyers

After formally applying for a home loan, your lender has three business days to provide you with a Loan Estimate. That three-page document identifies loan terms and total closing costs. You can then zero in on the detailed costs to identify areas for potential savings and compare it to Loan Estimates you get from other lenders.

You’ll also receive a Closing Disclosure no later than three business days before closing. That five-page document also details loan terms, payment amounts, and closing costs. Sellers get a two-page Seller’s Closing Disclosure revealing the home purchase price and the costs they need to pay at closing.

What fees are included in closing costs?

Closing costs fall under various categories: loan-related, property-related, administrative fees, sales-service-related, taxes, and escrow. All the listed costs here won’t apply to every closing. The person responsible for making the payment may also differ, depending on the rules and regulations in your jurisdiction.

Buyer closing costs

Application fee

Some lenders will charge you an application fee. As the name implies, this fee is the cost to apply for the mortgage and helps cover the clerical expense to process the application. Some lenders choose to charge an application fee in place of the appraisal fee and credit report fee.

Appraisal fees

If you're purchasing a home with a mortgage, the lender will require an appraisal on the property. If you default on the loan, the lender will sell the house to recapture the balance of the loan, so they want to be sure the home is actually worth the amount of the loan. The cost of the appraisal will vary due to location, sales price, mortgage program, and the number of units. For example, two- to four-unit homes tend to cost more than single-family homes. FHA, VA, and USDA loans cost you more to appraise.

Assumption fee

You need to pay the lender an assumption fee if you’re taking over the seller’s mortgage (assumable mortgage). The lender may set a flat amount or a loan percentage. VA and FHA lenders cannot exceed maximum limits: $300 for VA loans and $900 for FHA loans.

Attorney’s fees

In some states (like New York, for example), the buyer is represented by an attorney to ensure the buyer's interests at closing are protected. The cost of representation for a real estate transaction can be as much as $1,500.

Surveying fee

Your lender may require a land survey (also called property survey or location survey) to identify the physical boundaries of the property you’re buying.

Rate lock fee

Some lenders charge a fee to lock in an interest rate for a short timeframe, usually 30–60 days. This can be worthwhile if you’re in a competitive market or not looking to buy a home immediately.

Prepaid interest

You start racking up interest on your loan the day you close on your property. But your first mortgage payment may be a month down the road. So, your mortgage company has you pay that interest upfront.

Discount points

The mortgage interest rate can be reduced by buying discount points. A discount point is one percent of the loan amount. For example, if you pay (or buy) one point and the loan amount is $100,000, the point will cost you $1,000 ($100,000 x 1% = $1,000). Pay two points, and you'll pay $2,000 ($100,000 x 2% = $2,000). So, why would anybody pay points? A reduced interest rate over the life of your loan could save you thousands more than what you’ll pay for discount points. Learn more about how mortgage point savings are calculated.

Loan origination fee (underwriting fee/administrative fee/loan processing fee)

The origination fee can be discount point(s), a collection of fees to process the loan, or a combination of both. It’s usually 1% of the loan amount. Fortunately, the new Loan Estimate breaks down the origination fee nicely. This fee will also cover the cost for underwriting the loan. The underwriter is the approval person for the lender. They will make sure all the paperwork is complete and will determine whether the bank or mortgage company will approve the loan application.

Mortgage broker fee

Mortgage brokers screen lenders and help borrowers find and secure home loans. Their compensation commonly comes out of the loan origination fee.

Mortgage insurance

Private mortgage insurance is a requirement if you don’t make a 20% down payment on your conventional loan. You may only need to pay one month’s premium at closing, or your lender could require a full year upfront.

FHA lenders require a 10% down payment to avoid mortgage insurance. Otherwise, you must make a mortgage insurance payment at closing and pay an MIP fee.

FHA, VA, and USDA fees

These government loan programs include a variety of fees and costs specific to each one. For example, VA loans require a funding fee from most borrowers at closing. It’s a percentage of the mortgage, but the amount varies depending on the down payment amount, if you’re a first-time VA homebuyer, your military service classification, and whether it’s a purchase or a refinance.

Credit reporting fees

The lender will request a credit report on the applicant(s) from each of the three largest credit agencies. All three credit reports will be "merged" into one credit report. It is not uncommon for some credit history to be reported to one agency and not the others. For this reason, the applicant's credit history is combined into one integrated report.

Mansion tax

Some states charge a mansion tax on properties exceeding a certain amount, usually in excess of $1 million.

Recordation tax/excise tax

The recordation tax is another name for the recording fee. This cost can be fixed or be based on a percentage of the sales price, mortgage amount, or both.

Homeowners insurance

Your homeowners insurance premium isn’t technically a closing cost. But you need those funds at or before closing to secure a year of insurance coverage for your new home. Your lender needs to know their collateral is protected in case of damage.

Flood insurance

Flood Insurance, like homeowners insurance, will be escrowed and paid when the flood insurance bill comes due (if applicable). Learn more about flood insurance requirements.

Flood certification/flood certification report

Water can create immense damage, so lenders need to know if the property resides in a flood-prone area. The lender obtains a flood certification to determine whether the home could be subject to a flood. If the home does reside in a flood area, the lender will require a flood insurance policy.

Settlement fee

The charge by the attorney, settlement company, or title insurance company to handle the ownership transfer. The settlement company is usually responsible for recording the deed transfer, the payment of any recording taxes, and other documents registered with the recorder’s office.

Tax service fee

This fee (also called a tax monitoring or tax status research fee) is paid to a company to verify that the real estate taxes have been paid and/or to inform the lender of the current cost of the real estate taxes on the property.

Title search fee

Some title companies/settlement companies charge a separate fee for searching the ownership history at the courthouse or county records.

Title endorsements

Endorsements to the title policy are extra protections. A title endorsement could include covenants, conditions, and restrictions of the neighborhood.

Title policies

Title insurance protects the lender or the property owner against ownership issues. Lender’s title insurance protects the mortgage company from title claims against the buyer. Optional owner’s title insurance protects the buyer if someone sues over a title dispute. The cost of title insurance is regulated in most states and sellers customarily pay for this expense in many areas.

Seller closing costs

Seller’s attorney’s fees

If a seller chooses to be represented by an attorney at closing (or is required to by their state), they’re responsible for the fees.

Homeowners Association dues

Sellers with homes in an HOA area must be current on their dues through the date of closing.

Homeowners Association transfer fees

If the house is in an area with an HOA, the buyer will assume responsibility for the HOA dues when they buy the home. The HOA charges a fee to transfer that fee payment. The buyer also receives detailed financial information about the HOA and their payment schedule.

Transfer taxes (stamps)

Most states charge a real estate transfer tax when you buy a house. The transfer tax is a sales tax on real estate. The cost of the transfer tax varies from state to state and county to county. The recorder will usually affix postage stamps to the documents upon payment of the tax. Some states, like Pennsylvania, have a state transfer tax, a local transfer tax, and a school transfer tax.

Liens/judgements against the property

Title searches should find any property liens or judgments against the property being sold. The seller must settle the debt for a clear title. That’s often something the seller takes care of before closing. But, in some cases, the seller may arrange to have the debts deducted from the sales proceeds at closing.

Closing cost credits/seller concessions

In some instances, sellers may help cover some of the buyer’s closing costs. But the law limits the amount they may offer to pay, depending on the loan type. For example, VA loans allow sellers to pay a maximum of 6% of the home’s value.

Home warranty costs

A seller may purchase a home warranty to make the home more attractive to buyers.

Outstanding mortgage amount payoff

When there’s an outstanding mortgage, the loan balance will be deducted from the sales funds. Use a real estate commission calculator to know how much you’ll make on your home after mortgage payoff and real estate commissions.

Closing costs for buyers and sellers

Home inspection fees

Buyers can pay for a general home inspection for peace of mind. That expense is not part of closing costs. Instead, you’ll pay out of pocket when you order the service. But in some areas, lenders require certain inspections and certifications. For example, South Carolina lenders require termite (CL-100) inspections and certifications. You may also need a lead paint inspection for homes built before 1978.

Property taxes

Your state, county, and sometimes local government collect property taxes from homeowners every year. When you close on a house, those funds must be secured to pay the tax bill when it comes due. Some buyers and sellers split them 50/50 while others prorate the amount. In some states, the property taxes are paid annually to the counties/municipalities and/or school districts, while other counties have semi-annual taxes. No matter how the property taxes are paid, you are likely to pay something at closing so there is enough money in escrow to pay the taxes in full when they come due.

Recording fees/notary fees

After all the papers are signed, the settlement company will “record” all the deed and mortgage paperwork at the city or county recorder’s office. The recorder’s office is the place that tells any interested party who owns the property in the county and if anyone has a lien against the property.

FAQ about closing costs

Are closing costs tax deductible?

No, most closing costs are not tax deductible, regardless of filing status. But there are a few possible exceptions. Discount points (including the origination fee), prepaid interest, mortgage insurance premiums, and upfront property taxes may be deductible if you itemize instead of taking the standard deduction. It’s best to speak with a financial adviser or tax professional before claiming any closing costs on your taxes.

When are closing costs due?

Closing costs are due when you close on your house and sign your final loan paperwork. You will need to either bring a cashier’s check to cover the closing costs or arrange to wire the funds to escrow on that same day.

Who pays closing costs: the buyer or the seller?

The home buyer usually pays for the bulk of closing costs, although the seller will have some closing cost responsibilities as well. Who pays what will depend on where you live and what kind of deal you’ve negotiated.

How do you get closing costs waived?

Closing costs cannot be waived because they’re a requirement when purchasing real estate. But there are things you can do to keep some of those costs down, including looking into home buyer rebates and negotiating realtor commission.

How much are closing costs in Pennsylvania?

The average closing costs for buyers in Pennsylvania run between 5–6% of the loan amount. Property taxes are a big part of the total. You should calculate Pennsylvania closing costscbefore you start house hunting to learn how much house you can afford.

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