Closing Costs: What They Are and How Much They Cost

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What Are Closing Costs?

Closing costs are the expenses over and above the property's price that buyers and sellers incur to complete a real estate transaction. These costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. By law, lenders are required to provide buyers with a closing disclosure three business days before a scheduled closing, or settlement, date.

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 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 property title is transferred from the seller to the buyer. The closing costs can vary by location and depend on the property value. Homebuyers typically pay between 3% and 6% of the purchase price in closing costs. A mortgage of $300,000 will cost approximately $9,000 to $18,000 at settlement.

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The nationwide average closing costs for a single-family property in 2021 were $6,905 with transfer taxes and $3,860 excluding taxes, according to a survey by ClosingCorp, a national firm specializing in these costs. By state, the highest closing costs incurred by the percentage of the sales price were in the District of Columbia at 3.9%. Missouri ranked lowest in costs at 0.8%.

Under the federal Real Estate Settlement Procedures Act (RESPA), the lender must also provide a closing disclosure statement outlining all closing fees.

Buyers pay most of the closing costs in a real estate transaction, but buyers can negotiate with a seller to help cover closing costs.

What Do Closing Costs Include?

• Application Fee: Fee charged by the lender to process a mortgage application.
• Attorney Fee: A fee is required in some states and charged by a real estate attorney to prepare and review home purchase agreements and contracts.
• Closing Fee: Also known as an escrow fee, this is paid to the closing company.
• Courier Fee: Paid for the transportation of paper documents.
• Credit Report Fee: A charge to pull credit reports from the three major credit bureaus.
• Escrow Deposit: Some lenders require a deposit of two months of property tax and mortgage insurance payments into an escrow account at closing.
• Flood Determination and Monitoring Fee: A fee paid to a certified flood inspector to determine whether the property is in a flood zone and requires flood insurance.
• Homeowners Insurance: Evidence of a prepaid homeowners insurance premium.
• Lead-based Paint Inspection: A fee is paid to a certified inspector to determine if the property has hazardous lead-based paint.
• Title Insurance: Paid to the title company and protects the lender and buyer if an ownership dispute or lien arises not found in the title search.
• Origination Fee: This covers the administrative costs to process a mortgage and typically 1% of the loan amount.
• Pest Inspection: This covers the cost of a professional pest inspection for termites, dry rot, or similar damage.
• Points: Points or discount points are an optional, upfront payment to the lender to reduce the interest rate on a loan.
• Prepaid Interest: Interest that accrues on a loan between closing and the date of the first mortgage payment.
• Private Mortgage Insurance (PMI): Required with less than a 20% down payment. A month of PMI may be mandated at closing.
• Property Appraisal Fee: A fee to assess the home's fair market value.
• Property Tax: All local property taxes incurred within 60 days of the home purchase.
• Recording Fee: A fee charged by the city or county for recording public land records.
• Survey Fee: A fee charged by a surveying company to confirm a property's boundaries.
• Title Search Fee: Fees charged to analyze property ownership records.
• Transfer Tax: Tax levied by the state or local government to transfer the title from the seller to the buyer.
• Underwriting Fee: A lender fee to verify the buyers' financial information, income, employment, and credit for final loan approval.

Depending on the type of mortgage or property, additional closing costs may include FHA mortgage insurance, a VA loan fee, or a homeowners association (HOA) transfer fee. Both FHA and VA loans apply to qualified buyers. Homeowners associations are commonly found in condominium or apartment communities.

Can You Negotiate Closing Costs?

Some closing costs may be negotiable. If a buyer suspects a lender is adding unnecessary fees, they can ask for a reduction or clarification. Buyers should be wary of excessive processing and documentation fees and may be able to reduce closing costs by:

• Shopping around: Compare fees among lenders. Buyers are not obligated to use the title company, pest inspector, or home insurer that the lender suggests.
• Schedule closing at the end of the month: A closing date near or at the end of the month helps cut down on prepaid interest charges.
• Work with the seller: Buyers may be able to negotiate with sellers to either lower the purchase price or cover a portion of 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.

Who Pays a Realtor's Commission at Closing?

Real estate commissions represent one of the highest costs at a typical closing. Buyers don’t pay this fee, 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.

What Is a No-Closing-Cost Mortgage?

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 short on cash, but they usually come with higher interest rates. Lenders may also offer to roll closing costs into the mortgage, but that means buyers owe more on the loan and have to pay interest on those closing costs over time.

Can Closing Costs Change from the Estimate Date to the Settlement Date?

Buyers should review the initial loan estimate carefully. If a lender can’t explain a fee or pushes back when queried, it may be a red flag. It’s not uncommon for closing costs to fluctuate from preapproval to closing, but big jumps or surprising additions deserve scrutiny.

The Bottom Line

Closing costs include various fees due at the closing or settlement of a real estate transaction. Buyers are responsible for most of the costs, which include the origination and underwriting of a mortgage, taxes, insurance, and record filing. Closing costs must be disclosed by law to buyers and sellers and agreed upon before a real estate contract is completed.