Closing Costs Explained: What Buyers Pay and Why
Closing costs are the fees and prepaid expenses due when a purchase completes, on top of the down payment. They vary by state, loan and price, and some are negotiable. This guide explains each category, how to read your disclosures and how to keep costs down.
Key Takeaways
- Closing costs include lender fees, third-party services, government charges and prepaid items such as insurance and property taxes.
- Your Loan Estimate gives an early itemized estimate; the Closing Disclosure shows the final figures.
- Who pays which costs depends on local custom and on what you negotiate with the seller.
- Auction, REO and short sale purchases shift some costs, and auction buyers may face back taxes or liens.
What closing costs are
Closing costs are the expenses, beyond the purchase price, that buyers and sellers pay to complete a real estate transaction. For a buyer using a mortgage, they generally fall into four groups:
- Lender charges for originating and processing the loan, and any points you choose to pay to lower your rate.
- Third-party services such as the appraisal, credit report, title search, title insurance, settlement or escrow services, and surveys or inspections the lender requires.
- Government fees and taxes, such as recording fees and, in some states and localities, transfer or mortgage taxes.
- Prepaid items and escrow deposits, which are not fees but advance payments of costs you would owe anyway, such as homeowners insurance, property taxes and mortgage interest.
The total varies widely. It depends on your state and county, your loan type and amount, the price, your lender's pricing and how the costs are divided with the seller. Rather than relying on a general percentage, use the figures on your own Loan Estimate, and the closing cost calculator for planning before you have one.
Closing costs are separate from your down payment. On your Closing Disclosure, the figure you actually need to bring, called cash to close, combines the down payment and closing costs and then subtracts your earnest money deposit and any credits from the seller or lender.
Common buyer closing costs
The names on your disclosures may differ slightly, but most buyer costs fit the categories below.
| Category | Examples | Notes |
|---|---|---|
| Loan origination | Origination or underwriting fee, application fee, discount points | Set by the lender; compare across lenders using Loan Estimates |
| Appraisal and credit | Appraisal fee, credit report fee, flood certification | Often paid before closing or listed as paid outside closing |
| Title and settlement | Title search, lender's and owner's title insurance policies, settlement or escrow fee | Who pays for each varies by local custom |
| Government | Recording fees, transfer taxes, mortgage taxes where they apply | Set by state or local government; some places have none |
| Prepaid items | Homeowners insurance premium, prepaid interest, property taxes | Costs of owning, paid in advance |
| Initial escrow deposit | Reserves for future property tax and insurance bills | Held by your lender or servicer |
| Other | Survey, pest inspection, HOA transfer or document fees, attorney fees | Depends on the property, location and loan |
A home inspection is usually paid directly to the inspector before closing, but it is still part of the cash you need for the purchase.
Discount points are optional. Each point is a fee equal to 1% of the loan amount that buys a lower interest rate. Whether it pays off depends on how long you keep the loan.
Prepaid items and the escrow account
Prepaid items often surprise buyers because they can be a large share of cash to close, even though they are not fees.
Prepaid interest. Mortgage interest is generally paid in arrears, so at closing you typically pay interest from the closing date to the end of that month. Closing later in the month usually means less prepaid interest, but it does not reduce your total cost; it just changes the timing.
Homeowners insurance. Lenders typically require the first year's premium to be paid at or before closing.
Property taxes. Depending on when tax bills are due in your area, you may need to pay some taxes at closing. Taxes are also usually prorated between buyer and seller, so one side credits the other for the part of the tax period each owns the home.
Initial escrow deposit. If your loan has an escrow account, the lender collects a starting balance so there is enough to pay upcoming tax and insurance bills. Federal rules limit how large a cushion a lender may require.
After closing, your monthly payment (PITI) includes amounts for taxes and insurance, and the servicer reviews the escrow account each year. If taxes or premiums rise, your payment can rise too, even with a fixed-rate loan. That is why it is worth checking the property's real tax bill and getting an actual insurance quote rather than relying on estimates.
Who pays what
There is no single national rule for dividing closing costs. Three things decide it: local custom, the purchase contract and loan program limits.
Local custom. In some areas the seller customarily pays for the owner's title policy or transfer taxes; in others the buyer does, or they split them. Your agent or closing agent can tell you what is usual where you are buying.
The contract. Buyers and sellers can agree to divide costs differently from custom. A buyer might ask the seller for a credit toward closing costs, sometimes called a seller concession, especially when the home needs work or the market favors buyers. The seller may agree, may counter or may prefer to lower the price instead.
Loan program limits. Most loan programs cap how much the seller can contribute to the buyer's costs, and the cap can depend on your down payment and whether the home is your primary residence. Credits also generally cannot exceed your actual closing costs. Ask your lender for the limit that applies before you negotiate.
Sellers usually pay their own costs, such as paying off their existing loan and any liens, their share of prorated taxes and, in many cases, real estate commissions. How commissions are paid and shared has changed in recent years and is negotiable, so make sure any arrangement is written into your agreements.
Our guide on making an offer and negotiating covers how to request concessions as part of an offer.
Reading the Loan Estimate and Closing Disclosure
For most mortgage loans, federal rules require two standardized forms that show your costs.
- Loan Estimate. The lender must provide it within three business days of receiving your application. It shows estimated loan terms, monthly payment and closing costs.
- Closing Disclosure. You must receive it at least three business days before closing. It shows the final terms and costs.
Not every cost is allowed to rise between the two. In general:
- Some charges cannot increase, such as the lender's own fees and transfer taxes.
- Some can increase only within a limited tolerance in total, such as recording fees and third-party services you chose from the lender's list of providers.
- Some can change by any amount, such as prepaid interest, insurance premiums, escrow deposits and services you shopped for yourself.
Increases are allowed in certain circumstances, such as when you change the loan or new information affects your eligibility, in which case the lender issues a revised estimate. If a charge rises beyond what the rules allow, the lender generally must refund the difference.
When your Closing Disclosure arrives, compare it line by line with your most recent Loan Estimate. Ask your lender about every difference before closing day. The guide to closing day lists what else to check in the final days.
Closing costs on distressed purchases
The basic categories are the same for distressed properties, but how they are divided and which extras appear can change.
Short sales. The seller's lender reviews the settlement figures because it is accepting less than it is owed. It may limit what the seller can pay, decline to cover certain costs or ask the buyer to pay items a seller would normally cover. Read the approval letter carefully.
Bank-owned (REO) homes. Bank addenda often specify which closing costs each side pays, may require the buyer to use or avoid particular closing providers, and can include per-day penalties if the buyer causes a delay. Some sellers also prorate taxes and HOA dues in ways that differ from local custom. These terms are sometimes negotiable, but only before you sign.
Foreclosure auctions. There may be no lender fees if you pay cash, but you can still face recording fees, transfer taxes where they apply, the cost of your own title search and title policy, and any unpaid property taxes or surviving liens. Depending on the auction, there may also be a buyer's premium or other sale fees. Include all of these in your maximum bid; the guide to title and liens explains which debts can survive a sale.
Investors should also count holding costs, such as insurance, utilities and loan interest during repairs, which are not closing costs but are paid out of the same budget.
Ways to reduce closing costs
You cannot avoid closing costs entirely, but you can often reduce them or change when you pay them.
- Shop lenders. Lender fees and rates vary. Compare Loan Estimates for the same loan, and ask lenders to match or explain differences.
- Shop the services you are allowed to choose. Your Loan Estimate lists services you can shop for, which may include title and settlement services in some areas. Get quotes.
- Negotiate with the seller. Ask for a closing cost credit within your loan program's limits, particularly when the home needs repairs or has been on the market for some time.
- Consider lender credits. Some lenders will pay part of your closing costs in exchange for a higher interest rate. This lowers your cash at closing but raises your long-term cost.
- Look into assistance programs. Many state and local housing agencies offer help with down payments or closing costs for eligible buyers. Rules and availability vary; the guide to checking your finances covers how lenders verify gift funds and other sources of cash.
- Ask about title reissue rates. In some places, title insurers offer a reduced premium if the property was insured recently.
- Time your closing. Closing date affects how much prepaid interest you owe at closing, although not your total interest.
Be cautious about "no closing cost" offers. The costs usually still exist and are recovered through a higher rate or a larger loan. That can make sense if you expect to sell or refinance soon, but compare the total cost over the time you expect to keep the loan.