Closing Costs: What Are They And How Much Are They?

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There are various costs involved in buying a home, but the biggest cost you need to prepare for is the mortgage closing cost. Closing costs must be paid on the closing date. Here we explain what is included in the closing costs and how much they cost.

What are closing costs?

Mortgage closing costs include all expenses associated with applying for a loan and closing on the sale of a property. Some of the costs are property-related, while other costs are associated with the mortgage lender’s services and the paperwork involved in the transaction.

In a home sale, both the buyer and seller typically pay closing costs. Closing costs paid by the seller are usually deducted directly from the sale price. Buyers usually pay their own out-of-pocket costs.

What are the closing costs?

Mortgage closing costs typically range from about 2 to 5 percent of the total loan amount.

Your total closing costs will depend on three main factors:

• Home prices
• Location of the house
• Whether you are buying or refinancing

According to the latest research from real estate data firm ClosingCorp, the average closing cost for buying a single-family home was $6,905 in 2021, the most recent year available. The average closing cost for refinancing was $2,375.

However, these costs vary widely across the country, in part due to differences in taxes. For example, homebuyers in Washington, DC, have the highest average closing costs at $29,888. Delaware and New York came in second and third, respectively, with average closing costs of over $16,000. The lowest closing costs were in the central part of the country in Missouri ($2,061), Indiana ($2,200), and North Dakota ($2,501).

What are the closing costs included?

Here’s a list of what’s included in closing costs, whether paid by the buyer or seller:

Who pays the closing costs?

The buyer pays most of the closing costs, but the seller also pays some, such as the real estate agent’s commission. The buyer might negotiate some of the costs to benefit the current homeowner, but that’s only possible if the seller doesn’t have any other offers.

Settlement costs paid by the buyer

• Appraisal fee: This fee covers the work done by a licensed appraiser to determine the value of your home. According to HomeAdvisor, the average appraisal fee for a single-family home is between $300 and $425. Although this is considered a “closing” cost, it’s usually paid well before the closing date.
• Title Search: Unless you’re buying a new home, your lender will hire a title search firm to check the property records to make sure there are no issues with the title to the home, such as tax liens. The fee for a title search is about $300.
• Title Insurance: Lenders require borrowers to purchase title insurance in case there are problems with the title after the sale. This insurance protects the lender and typically costs between 0.50 percent and 1 percent of the mortgage amount.
• commissionLenders can charge a financing fee for originating a loan, which is usually between 0.5 to 1 percent or more of the amount borrowed.
• Underwriting fee: This fee covers the costs of evaluating and verifying your financial qualifications and eligibility. The underwriting fee may be a flat fee or a percentage of the loan, such as 0.5 percent of the amount borrowed.
• point: To lower your mortgage interest rate, you can also pay mortgage points, or discount points. Typically, you pay 1 percent of your loan principal to lower your interest rate by 1 point, which often equates to a 0.25 percent reduction in your interest rate.
• Home Inspection: Even if an inspection isn’t required, it’s still wise to have one inspected to uncover any issues before you buy the home.
• Attorney’s fees: There may be a fee charged to cover the attorney’s costs associated with closing on your mortgage.

Closing costs paid by the seller

• Transfer TaxMany states impose a transfer tax when property changes hands. In most cases, this tax is paid by the seller, but in some places the buyer also pays.
• Other fees: Sellers pay some of the same fees as buyers, including attorney’s fees and pro-rated property taxes.

How to reduce closing costs

While you won’t have to pay all of your mortgage closing costs, there are some you can negotiate and save on. Here are some tips:

• Find a lender that offers discounts: Consider working with a mortgage lender that doesn’t charge origination fees or offers discounts. If you’re taking out a mortgage with a bank, you can also ask for discounts or waived fees since you’re already a customer.
• Apply for down payment assistanceConsider down payment assistance or grants to help cover closing costs, especially if you’re a first-time homebuyer.
• Get a fee-free loan: Consider a mortgage with no closing costs, but don’t be fooled by the name: You’ll either finance your closing costs with the mortgage (and pay the interest on them), or you’ll “pay” your closing costs by paying a slightly higher interest rate.
• Negotiate seller concessions. To facilitate a sale, the seller may agree to pay some of the expenses. Depending on the type of loan, there are limits on the amount a seller can make concessions. Conventional loans qualify for up to 9 percent of the purchase price or appraised value, whichever is lower. FHA and USDA loans qualify for up to 6 percent, and VA loans qualify for up to 4 percent combined. Jumbo loans vary by lender.

Frequently Asked Questions About Closing Costs