Closing Costs Explained: What Buyers and Sellers Pay
What closing costs are, typical amounts, which fees buyers and sellers usually pay, and practical ways to reduce them.
Closing costs are the fees and expenses paid to complete a real estate transaction, separate from the down payment. Buyers are often surprised by them, so it pays to budget early. Buyers commonly pay around 2% to 5% of the loan amount, though the total varies widely by state, loan type, and price.
Common buyer closing costs
- Lender fees: origination or underwriting fees, application fees, and any discount points you choose to buy.
- Appraisal fee: pays for the independent valuation your lender requires.
- Credit report fee.
- Title insurance: a lender's policy is usually required; an owner's policy protects you against title defects and is strongly recommended.
- Title search, settlement, escrow, or attorney fees: depending on your state, closings are handled by title companies, escrow companies, or attorneys.
- Recording fees and transfer taxes: charged by local governments; who pays transfer taxes depends on local custom.
- Prepaid items: homeowners insurance premium for the first year, prepaid interest through the end of the month, and initial deposits into your escrow account for taxes and insurance.
- Home inspection and survey: sometimes paid outside of closing.
Common seller closing costs
Sellers typically pay agent commissions as negotiated in their listing agreement, their share of title and escrow fees, transfer taxes where customary, payoff of their mortgage and any liens, prorated property taxes, and any credits agreed to for the buyer.
How to read your Loan Estimate and Closing Disclosure
Within three business days of applying, lenders must give you a Loan Estimate. At least three business days before closing, you receive a Closing Disclosure with the final numbers. These standardized forms, created by the Consumer Financial Protection Bureau, make it easy to compare lenders and to catch changes. Some fees can't increase at all between the two, and others have limited tolerance, so question any unexpected increase.
Ways to reduce closing costs
- Shop lenders and compare Section A (origination charges) of each Loan Estimate.
- Shop services you are allowed to choose, such as title insurance and settlement services in many states.
- Negotiate seller concessions, where the seller pays part of your closing costs, especially in slower markets.
- Consider lender credits in exchange for a slightly higher rate if you are short on cash and don't plan to keep the loan long.
- Look for assistance programs that cover closing costs for first-time or moderate-income buyers.
- Close near the end of the month to reduce prepaid interest (though this doesn't change your total cost much over time).
Beware of wire fraud
Criminals impersonate title companies and agents with emails containing fake wiring instructions. Always confirm instructions by calling a phone number you obtained independently, never one from the email itself.
This article is for general educational purposes and is not financial, legal, or tax advice. See our disclaimer.