Understanding Closing Costs When Buying a Home
Buying a home is an exciting milestone—whether it’s your first time stepping onto the property ladder, you’re growing your investment portfolio, or simply upgrading to a new space. But as thrilling as it may be, the process can bring a few surprises, including closing costs. These often-overlooked fees can catch buyers off guard if they’re
Buying a home is an exciting milestone—whether it’s your first time stepping onto the property ladder, you’re growing your investment portfolio, or simply upgrading to a new space. But as thrilling as it may be, the process can bring a few surprises, including closing costs. These often-overlooked fees can catch buyers off guard if they’re not prepared.
All this guide will be used to describe what closing costs are, their expense, and how you must prepare for them so that you are adequately set with your home purchase.
What Are Closing Costs?
Closing costs are fees and charges paid at closing of a property sale. That is, they’re not costs associated with the cost of the house but are paid at closing when transferring ownership by the seller to the buyer.
These charges include a range of services, such as processing your home loan, taxes, and inspections. Comparable but not identical, closing charges generally range from 2% to 5% of the price of your home.
Some Common Closing Charges:
- Loan Origination Fees – Charges your lender makes for processing your loan.
- Appraisal Fees – Charge for having the home professionally appraised.
- Title Search and Insurance – Checks that there is no lien or claim pending on the property.
- Escrow Fees – Charge for the hiring of a third party to enable money transfer.
- Attorney Fees (if applicable) – Attorneys’ fee for legal representation in the acquisition process.
To estimate your closing costs, it helps to know what average is. Following is a brief overview of average closing costs on a $300,000 house:
| Expense | Average Cost |
| Loan Origination Fees | $1,500 – $3,000 |
| Appraisal Fee | $300 – $500 |
| Title Insurance | $500 – $1,000 |
| Inspection Fees | $300 – $500 |
| Escrow Fees | $500 – $2,000 |
Note: These are only averages, and your costs may vary based on the location of the home and the lender you’re working with. Bankrate offers a helpful calculator to estimate potential closing costs.
What Is Included in Closing Costs?
Closing costs are broken down into two categories—recurring costs and one-time fees.
Recurring Costs
These expenses will repeat after your first closing. Some examples are:
- Property taxes
- Home insurance premiums
- Private mortgage insurance (PMI) (if required)
One-Time Fees
Paid at closing only:
- Home inspection fee
- Title search fee
- Transfer tax
Who Pays Closing Charges?
Buyers and sellers can both be requested to pay closing charges depending on the nature of the transaction. Typically:
- Buyers pay fees associated with the mortgage, home inspection fee, and title insurance.
- Sellers pay transfer tax and real estate broker commission.
Always have closing costs clarified by your lender or agent prior to signing.
Coping with Closing Costs
To make closing costs slightly more tolerable, do the following:
- Shop Around for Lenders
Not all lenders are created equal. Get quotes from at least three lenders and select one that has decent terms and rates.
- Ask the Seller to Pay Some Costs
Depending on your position in the market, you can attempt to negotiate with the seller to pay some of your cost, so-called “seller concessions.”
- Save Ahead
Start saving for closing costs ahead of time—reserve them early when you start shopping for houses.
- Look for Assistance Programs
All states and local governments offer programs that assist first-time homebuyers in paying closing costs. Check out such resources as the down payment assistance guide on NerdWallet.
Example Closing Cost Breakdown on a $350,000 Home
Here is an example breakdown to have an idea of what closing costs would be in real life:
| Category | Cost |
| Loan Origination Fee | $2,000 |
| Title Search & Insurance | $800 |
| Home Inspection | $400 |
| Transfer Taxes | $1,050 |
| Escrow Fees | $1,200 |
| Total Estimated Costs | $5,450 |
Remember that this is only an example and that actual fees may vary.
Your Next Steps
Closing costs may seem daunting at first glance, but with a little planning, they are not required. Having some idea now of what they are, you are in a better position to plan and budget.
Still have questions? Speak with your real estate agent or lender for one-on-one advice.