What are closing costs and how much will you pay?

When you buy a home, you need to pay several upfront costs, including a down payment and closing costs. Mortgage closing costs — which include origination fees, title fees, and property taxes — are due on closing day and can be expensive. A study by the Consumer Financial Protection Bureau found that the median closing costs paid by homebuyers in 2022 were nearly $6,000.

Find out what fees are included in closing costs, how much they are, who pays them, and how to budget for them.

What are closing costs on a house and how do they work?

Closing costs are the fees borrowers pay, excluding the down payment, when getting a mortgage loan. They’re sometimes called settlement costs.

You’ll generally need to pay your closing costs on the same day you close on your new home before you get the keys. However, you might be able to roll your closing costs into your new home loan. This will reduce your upfront costs but increase your total loan cost.

Common closing costs include:

• Loan origination fees: These cover the cost of processing your application, completing underwriting, and other administrative expenses.
• Appraisal fees: A home appraisal is required by lenders to assess the value of your property.
• Survey fee: Your lender might require a survey of your lot to determine the boundaries.
• Lender title insurance: This is required to protect the lender in case any claims are made against the home after the sale is completed.
• Owner title insurance: This protects you if you buy a home and someone makes a claim against the property based on an issue that occurred before you bought the house. 
• Government fees: This can include recording fees and transfer tax
• Prepaid expenses: This includes interest, property taxes, homeowners insurance, and private mortgage insurance (PMI) if applicable
• Discount points: If you choose, you can pay an upfront cost in return for a lower interest rate, a process called paying discount points. One point is equal to 1% of the loan amount. 
• Miscellaneous fees: These could include attorney fees, credit report fees, and tax monitoring fees.

When you apply for a mortgage, you’ll receive a loan estimate detailing the approximate costs of your loan. A loan estimate is not a guaranteed approval, but it can help you decide whether you want to continue with your mortgage application.

If you do move forward with your application, your lender must give you a closing disclosure at least three business days before your scheduled closing date. This five-page document gives you the actual costs of your loan — including your loan amount, interest rate, monthly mortgage payment, and closing costs.

Compare your closing disclosure with your loan estimate before signing any final paperwork. If the numbers have changed, speak with your lender or attorney right away to find out why.

If everything’s in order, you’ll need to pay your closing costs — and any other upfront fees — via cashier’s check or wire transfer.

How much are closing costs?

In 2022, the average closing costs on a home were $5,954. This is a 21.8% increase from the previous year.

Closing costs depend on several factors, such as the cost of your home and your location.

Experts recommend setting aside 2% to 5% of your home purchase price for closing costs.

Here are the key factors that impact how much your closing costs will be:

• Home purchase price: More expensive properties typically have higher closing costs.
• Location: Certain states, like Alaska and Maryland, have higher closing costs. States like Arizona, Colorado, and Utah usually have lower closing costs.
• Appraisal and survey fees: These determine the fair market value of your new home and can vary depending on where you are.
• Loan origination fees: Your lender may charge an origination fee, which can include application fees, administrative fees, and underwriting fees. This can cost between 0.5% and 1% of the total loan amount.
• Title insurance: This cost will vary based on your home’s value and its location.
• Escrow fees: You may need to pay a portion of your property taxes and homeowners insurance upfront in an escrow account.
• Home inspection fee: This might not be required, but it’s generally wise to get an inspection done to ensure the property doesn’t have any major issues.
• Credit report fee: Sometimes paid before closing, this can cost around $30.
• Discount points: Purchasing discount points can lower your interest rate but increase your closing costs. One point is equal to 1% of the total loan amount, so if your loan is $200,000, you’d pay $2,000 for one point.

Who pays the closing costs?

Both the buyer and seller pay closing costs on a home. While it depends on where you live, here are the typical closing costs for the buyer:

• Loan origination fees
• Appraisal and inspection fees
• Prepaid expenses like taxes and insurance
• Title service fees
• Discount points
• Miscellaneous fees

These are the typical closing costs for the seller:

• Real estate agent commissions
• Seller credits
• Transfer taxes
• Title insurance
• Attorney fees (sometimes split evenly between the buyer and seller)

A few cases exist in which the seller will agree to cover a portion of the closing costs — or even all of them. For example:

• If you agree to pay more for their property, the seller might cover the closing costs. This means lower upfront costs for you, but a higher loan amount.
• If the property needs major repairs, the seller may contribute to your closing costs instead of making those repairs. You’ll still need to cover the repairs yourself later.

How to lower closing costs

Now that you know what closing costs are, the next step is to figure out how to pay them — or, more importantly, lower them. Here are a few tips:

• Use lender credits: A lender credit is money you get if you agree to pay a higher interest rate on your mortgage loan. Although it lowers your closing costs, it also increases your total interest payments.
• Compare multiple lenders: Certain closing costs — like origination fees — vary by lender. Shop around for lenders and ask for loan estimates to find the one with the lowest costs.
• Look for discounts: Some mortgage lenders offer special discounts. For example, they might pay a portion of your closing costs or give you lender credits to incentivize you to choose them.
• Research grant and assistance programs: Depending on your location and income, you could qualify for down payment assistance (DPA) or closing cost assistance programs. With these, you receive money to help with upfront costs. Most programs are geared toward low- or moderate-income households or first-time homebuyers.
• Negotiate with the seller: Depending on the current market and demand for the property, the seller might be willing to pay some or all of the closing costs. This is called seller concessions.
• Roll the closing costs into the loan: This lowers your upfront expenses but increases your total loan amount. This could mean a potentially higher monthly payment or interest rate.
• Watch out for junk fees: Some lenders will tack on additional fees that increase your closing costs. Keep an eye out for these charges or submit a complaint with the Consumer Financial Protection Bureau (CFPB).
• Look into tax deductions: Only a few closing costs are tax deductible. In particular, property taxes are tax deductible up to a certain amount. Keep track of your payments and see if you can claim a deduction when you file. It won’t lower your upfront costs, but it can help.

What are closing costs FAQ

How long does closing take?

There are many variables that can influence the time it takes to close, but you can typically expect the process to take 45 to 60 days. You’ll have to take care of the title search, scheduling any necessary appraisals, and submitting documents such as bank statements and pay stubs to the lender. You can help speed the process along by having your paperwork ready and responding to any requests from the lender as quickly as possible.

How do you calculate closing costs?

Closing costs on a home are usually between 2% and 5% of the total sale price. Many of these costs are fixed, while others are based on a percentage of the loan amount or home value.

To calculate these costs, you’ll need to add up all the fees you’re responsible for as the buyer. Alternatively, you can use the loan estimate to get a better idea of what you’ll pay. Just be sure to cross-reference the loan estimate with your closing disclosure to ensure everything is the same.

When do you pay closing costs?

You’ll generally need to pay closing costs on the day you’re scheduled to close on the home. It’s possible to roll some of these costs into the loan itself, but this can result in a higher loan or interest rate. You may also be able to pay some closing costs upfront with the rest going into the loan.

What is the largest closing cost?

This depends. One of the highest closing costs is the loan origination fee, which can be 0.5% to 1% of the total loan amount. If you are buying an $800,000 home, for example, you can expect to pay $4,000-$8,000.

Other potentially high closing costs include upfront property taxes and homeowners insurance. If you have an escrow account, you’ll need to pay the balance plus up to two months’ worth of a cash “cushion” or reserve.