Closing Costs: What You Actually Pay at the Table
Two to five percent of the purchase price, spread across fees that behave very differently.
Buyers budget for the down payment and get surprised by closing costs. They generally run 2% to 5% of the purchase price, so a $400,000 home can carry $8,000 to $20,000 of costs that have nothing to do with your equity in the property.
The useful distinction is not what each fee is called. It is whether you can shop for it, negotiate it, or do nothing about it at all.
Fees you cannot shop for
These come from the lender you chose or from the government, and the only way to change them is to change lender.
- Origination and underwriting fees. The lender's charge for producing the loan. Sometimes a flat fee, sometimes a percentage.
- Discount points. Optional prepaid interest that buys down your rate.
- Appraisal fee. The lender orders an independent valuation and you pay for it.
- Credit report fee. Small, and unavoidable.
- Recording fees and transfer taxes. Set by your state, county or city. These vary enormously by location and can be the largest single line in some jurisdictions.
Fees you can shop for
Federal disclosure rules identify certain services you are allowed to source yourself, and your Loan Estimate lists them under a heading saying so.
- Title search and lender's title insurance. Often the biggest shoppable item. Prices differ between title companies in the same city.
- Settlement or closing agent fee. The charge for handling the closing.
- Survey fee, where your state or lender requires one.
- Pest inspection, where required.
Lenders will hand you a preferred provider list. You are not obliged to use it, and getting two quotes on title work is often worth several hundred dollars for twenty minutes of effort.
Two kinds of title insurance
The lender's policy protects the lender for the loan amount and is required. An owner's policy protects your equity and is optional in most states. Buying both at the same time usually gets you a discounted simultaneous rate, so ask for that quote rather than treating them as separate purchases.
Prepaids, which are not really costs
A chunk of what you pay at closing is money you would have spent anyway, collected early.
You prepay interest from your closing date to the end of that month. You pay the first year of homeowners insurance up front. And you fund an escrow account, typically two to three months of property taxes and insurance, so the lender has a cushion to pay those bills when they fall due.
Closing on the 28th rather than the 3rd cuts your prepaid interest to a few days. Escrow funding is not a fee at all; the money sits in an account with your name on it and gets spent on your bills.
The two documents that let you check the numbers
Within three business days of your application, the lender must give you a Loan Estimate. At least three business days before closing, you get a Closing Disclosure. Both use a fixed format, which means you can lay them side by side and compare them line for line.
Use that three-day window. Some fees are allowed to change between the two documents and some are not. Origination charges and points cannot increase. Fees for services you shopped for from the lender's list are held within a 10% tolerance in aggregate. Prepaids and services you sourced independently can move freely.
If a number rose and you cannot see why, ask before you sign. After closing the leverage is gone.
Who pays what
Custom varies by state and everything is negotiable in the contract. Sellers commonly cover their own agent's commission, transfer taxes in some states, and any repair credits agreed after inspection. Buyers cover lender fees, the appraisal, title work and prepaids.
Seller concessions are worth asking about in a slower market. The seller contributes toward your closing costs, usually in exchange for a price the seller prefers. Loan programs cap how much a seller can contribute, and the cap moves with your down payment and loan type, so confirm the limit with your lender before writing it into an offer.
Rolling costs into the loan
Some programs let you finance closing costs rather than paying cash. That preserves your savings and costs you interest on the amount for as long as you hold the loan.
Do the arithmetic before deciding. Financing $10,000 over thirty years costs far more than $10,000. Whether that is worth it depends on what the cash would otherwise do, and on whether paying it leaves you without a reserve for the repairs that follow a purchase.
This article is general information about how consumer finance products work in the United States. It is not financial, tax or legal advice and is not a recommendation of any specific product or provider. Rules and pricing vary by state and by institution.