Be Prepared for Closing Costs When You Buy a Home

These property- and mortgage-related costs can add up

A family explores its new home.

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Along with tasks such as finding a real estate agent and exploring potential future homes, you’ll need to do a lot of financial planning during the homebuying process. Usually running up to 20% of your home’s price, a down payment is one big upfront expense to plan for. However, you might forget to account for another significant upfront expense: closing costs.

To ensure you’re financially ready to buy a home, take a look at what closing costs include, how much you can expect to pay, and how you can negotiate and pay them.

Key Takeaways

  • Closing costs typically run 3% to 5% of the loan amount, but depend on several factors.
  • Most closing costs relate either to the mortgage or property.
  • Your loan program, lender, property cost, and location affect closing costs.
  • Gifts, assistance programs, and seller or lender credits can help reduce what you need to pay upfront in closing costs.

What Are Closing Costs?

Closing costs are incurred for completing the real estate sale and financing processes. They come in various forms and account for everything from upfront taxes and fees to charges for services needed, such as appraisals and inspections. You’ll pay them at the closing meeting, which finalizes your responsibility for the mortgage as the new homeowner.

How Much Are Closing Costs?

Closing costs usually amount to 3% to 5% of the loan you’re taking out. So if you’re borrowing $400,000, you could pay $12,000 to $20,000 in closing costs.

However, your actual closing costs can vary. For example, a government loan program may have specific fees that increase closing costs versus a conventional loan. Your home’s price and the state in which you are buying have an effect, too. How you shop around and which lender options you choose can raise or lower closing costs.

Types of Closing Costs

Closing costs often relate either to the property itself or the mortgage process. While some costs can vary, you’ll find many types are standard for home purchase transactions.

Property-Related Closing Costs

Property-related closing costs cover the tasks needed to verify the home’s value and condition and transfer the property’s ownership. They also account for other fees and some prepaid items.

  • Title fees: These cover researching the title, obtaining title insurance, and paying the settlement agent.
  • Home appraisal: An appraiser will estimate the home’s current market value, which will be used for the lending decision.
  • Survey fees: This covers identifying your property’s lines to confirm rights.
  • Transfer costs: You’ll pay for the deed recording process and any applicable transfer taxes charged by government authorities.
  • Tax service provider fee: This accounts for the timely collection of property tax payments.
  • Home inspection: Sometimes required by lenders, this service helps identify problems with the property. Special inspections check for flood risks or pest problems.
  • Prepaid items: Prepaid amounts for property taxes and homeowners insurance will go into your escrow account for your lender to pay on your behalf. They can also include upfront flood insurance and homeowners association fees.

Mortgage-Related Closing Costs

When obtaining a mortgage, you’ll encounter closing costs related to processing the application and completing the underwriting process. These vary by lender and loan program.

  • Loan origination costs: These include an original fee based on a percentage of the loan amount as well as additional fees for the underwriting and application procedures.
  • Credit check fee: This covers your lender getting your credit report and score to determine your creditworthiness.
  • Discount points: These are optional for reducing your interest rate and mortgage payment.
  • Special funding fees: Certain programs such as Veterans Affairs or U.S. Department of Agriculture loans require an extra funding or guarantee fee that can depend on your down payment and loan amount.
  • Prepaid items: This covers the daily mortgage interest that accrues from the closing to first payment dates as well as any mortgage insurance due upfront.
  • Other fees: You can get charged for the courier and attorney involved with your mortgage documents, as well as pay a closing fee.

Who Pays Closing Costs?

You’ll pay most of the closing costs if you’re the buyer. However, state laws and loan contracts can make sellers responsible for certain costs. For example, the seller usually pays for agent commissions, their prorated property taxes and homeowners association fees, and the property title transfer.

How To Reduce What You’ll Pay on Closing Day

You have options for reducing the cash needed to close, but weigh the pros and cons of each.

Ask for a Seller Credit

During the negotiation process, you could ask the seller to contribute money toward your closing costs through a credit. While this reduces the cash at closing, you could end up needing to offer a higher price to get the seller to agree.

Ask Your Lender for Options

You can opt for a no-closing-cost loan to avoid upfront closing costs, or request lender credits to reduce the costs. However, these options can raise your interest rate and mortgage payment. You might also shop around for lenders who offer promotions that waive certain fees or charge lower interest rates that reduce that aspect of closing costs.

Shop Around for Certain Services

While many closing costs are set, you can shop around for better rates for those that are negotiable. These include services such as pest inspections, title insurance and searches, and surveys. The downside is the added time required.

Explore Closing-Cost Assistance Programs

State housing authorities often offer down-payment and closing-cost programs to potential homeowners who meet specific financial and property criteria. If you qualify, you might get a grant worth a percentage of the property’s price or be able to take out a loan to cover the costs. However, not everybody will qualify, and you’ll need to agree to terms for receiving the benefits.


The Ohio Housing Finance Agency offers down payment assistance up to 5% of the home’s purchase price. The assistance is forgiven after seven years of owning the home. Many states offer similar down payment and closing cost assistance programs.

Understanding Your Loan Documents

You’ll receive a loan estimate from your lender within three days following your mortgage application. This document details loan terms and payment amounts along with estimates for both the closing costs and total cash needed for closing.


Some closing costs could change before the actual closing, and the amount depends on the type of cost.

Your closing disclosure will arrive within the three days prior to closing and indicate the final closing costs. You’ll see the cash to close, which includes your down payment, closing costs, and any lender or seller credits, deposits, or other adjustments.

Paying Your Closing Costs

You’ll need to pay the total amount needed for closing either with your own funds or gifted funds. If you’re receiving gifted funds, lenders usually require a gift letter documenting the transaction, and different loan programs set limits on gift amounts.

Your lender should provide instructions on payment options. You’ll usually need to use a cashier’s check, certified check, or wire transfer. However, some lenders may allow personal checks or cash.


You can contact your bank to initiate a wire transfer or request a cashier’s or certified check. Expect to provide information about the transaction and payee plus pay a fee for these options.

The Bottom Line

Closing costs add to what you’ll need to buy your home, so keep the typical range in mind to prepare financially. As you shop around for mortgages, look for ways to reduce your closing costs, such as taking advantage of assistance programs, negotiating with the lender, or having the seller cover some costs. When you finally get your loan documents, review the itemized list of closing costs to see the cash you’ll need and look for ways to reduce costs when possible.

Frequently Asked Questions (FAQs)

Can I negotiate my closing costs?

You can negotiate with your lender to ask about getting certain fees waived, having money applied toward the closing costs, or finding ways to roll them into the loan. You can try convincing the seller to help you out with closing costs if you make an appealing enough offer. In addition, look around for lower-priced services such as title insurance in cases where they’re negotiable.

Does my credit score affect my closing costs?

Since your credit score affects the fees and interest your lender charges, it can affect your closing costs, too. For example, if you have a lower credit score, a higher interest rate translates to higher prepaid interest charges than if you got a lower rate with good credit. Another example is ending up with a high rate due to your credit score and opting to buy discount points to compensate.

Are closing costs tax-deductible?

While you can’t deduct most closing costs, the IRS allows a few deductions if you itemize. You can deduct up to $10,000 in real estate taxes paid on the qualified home during the year. The home mortgage interest deduction lets you deduct certain points and interest paid on a maximum of $750,000 of your mortgage.

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  2. Bank of America. "What Are Closing Costs?"

  3. CoreLogic ClosingCorp. “Average Closing Costs for Purchase Mortgages Increased 13.4% in 2021, CoreLogic’s ClosingCorp Reports.”

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  5. Rocket Mortgage. “Closing Costs: What Are They, and How Much Will You Pay?

  6. Consumer Financial Protection Bureau. “What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?

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