Learn what closing costs include when buying a home. Get a clear breakdown of fees and expenses to expect. Simplify your home buying process.
Buying a home is a costly endeavor. In 2024, the average price of a new home is around $420,000.1 But when you read the fine print, you’ll see there’s more to consider than just the price tag. There are realtors’ fees, and inevitable repair costs once you move in, but another significant expense comes as soon as you sign on the dotted line: closing costs. So, what are closing costs, and what do closing costs include? Keep reading as we examine all the expenses that fall under the closing costs umbrella — as well as some ways to minimize yours.
As many homeowners know, the homebuying process is not as simple as seeing a “FOR SALE” sign in a yard and knocking on the door with a briefcase full of cash. Instead, it’s a complex financial (and legal) procedure involving credit checks, financial audits, lawyers and other professionals, and all the paperwork you might expect. Combined, these many, many expenses make up your total closing costs.
Both buyers and sellers are responsible for paying closing costs, but buyers generally pay most of them. With that said, closing costs can be a valuable bargaining tool, with some sellers agreeing to cover some or all of a buyer’s closing costs to finalize the sale.
Closing costs will also vary from state to state. Generally, buyers can expect to spend anywhere from 3 to 6 percent of the home’s purchase price in closing fees. These costs can be paid when you close on your mortgage, or in some cases, they can be baked into your mortgage and paid over the life of the mortgage loan. Just keep in mind that these fees can balloon in size over a 15- or 30-year mortgage, so it might make more sense to pay them upfront if you are able.
While not every homeowner will be responsible for the same closing costs, there are a handful of expenses that buyers (and some sellers) can look out for.
When you apply for a mortgage, your lender will typically charge you a loan origination fee simply for processing the mortgage loan. On average, loan origination fees are between .5 and 1 percent of the total loan amount.2 While seemingly insignificant, 1 percent of the median home cost can amount to over $4,000.
Mortgage lenders generally require a professional home appraisal before issuing a loan, ensuring that the property is worth what you are preparing to pay for it. The cost of a home appraisal can vary based on the size of the home and the number of rooms, but it averages roughly $450 nationwide.
Completed by a title company prior to the purchase of a home, a title search helps identify a home’s rightful owner –– revealing any liens that might be against the property and ensuring a smooth sale. But even if no issues are identified, title insurance can help safeguard against liens that may arise with time by covering any relevant legal costs. The cost of a title search is nominal, usually only $100 or so. Title insurance, on the other hand, is typically between .5 and 1 percent of the home’s total price.3 Fortunately, title insurance is not mandatory, but you may find that the added comfort is worth the cost.
Like a home appraisal, a home inspection assures lenders and potential buyers that the home is worth its asking price. It also assures both parties that they aren’t getting themselves into a potential money pit. This mandatory (and worthwhile) expense is generally between $200 and $500, but it can save homeowners thousands by identifying issues before a sale has been finalized.
Property taxes are yet another component of closing costs. Homeowners generally have the option to pay a portion of their property taxes at closing or to roll them into their monthly mortgage payments –– which may be the easier approach. Calculating your property taxes can be a bit tricky, but your lender will likely crunch the numbers to let you know how much you owe at closing.
Homeowners insurance may be required at closing—not by states but by lenders looking to protect their investments. If this is the case, going without homeowners insurance may cause your mortgage to default. Homeowners insurance can be paid monthly or yearly, but it is not uncommon for the first year of coverage to be included in closing costs.
Buyers with smaller down payments –– less than 20 percent of the home’s total value –– may be required to purchase private mortgage insurance (PMI) at the time of closing. The average cost of private mortgage insurance ranges from .5 percent to 1.5 percent of the loan amount, though only a small portion of this is typically due at closing unless you choose to pay for PMI coverage in advance.4
Most closing costs can be categorized as additional fees. Prepaid costs, on the other hand, are expenses due at closing that are applied toward future costs. They consist primarily of:
When you close (earlier in the month versus at the tail end) will determine how much mortgage interest you accrue and how much prepaid interest you’ll be responsible for at closing. Keep in mind, however, that the amount you pay will effectively be credited toward your first mortgage payment.
Whether you need to make an escrow payment at all will depend on your lender’s specific requirements, but it’s possible that you’ll be asked to make a deposit in your escrow account to go toward future housing expenses.
As mentioned above, homeowners insurance and property taxes are both generally due at closing. Again, these fees are prorated, so you’ll only pay for the amount of coverage you’re “using,” and when you pay them at closing, you’ll be covered for the remainder of the year.5
No, buying a home is not as simple as exchanging a pile of cash for the keys to a property. Rather, the whole process is meticulously recorded, with the change of ownership being entered into public record. And as you might have predicted, this, too, comes at a cost. Government recording charges are paid to the state to cover the cost of entering your deed, mortgage, and loan documents into public record.6
But before you start budgeting for yet another closing cost, it’s worth noting that recording fees are typically far less costly than many other closing costs. Plus, your lender will clearly outline the amount you owe well before your recording charges are due.
In addition to the many expected closing costs outlined above, you may find a handful of these assorted administrative fees tacked onto your bill.
Even in the internet age, couriers may be required to transport time-sensitive documents –– like mortgage materials –– in order to meet deadlines. This may feel like an unnecessary fee to some, but it’s a worthwhile expense compared to the headaches that can come from unwanted delays in the homebuying and closing process.
Your mobile banking app and certain websites will provide you with a credit report free of charge. When buying a home, however, lenders will typically pull reports from two (or more) sources to make sure your credit history is accurate. This comes at a cost of roughly $35, depending on the lender.7
Property surveys are typically part of the homebuying process, and some lenders will require a survey prior to the completion of the purchase. This is for the buyer’s benefit –– knowing the precise footprint of the property before assuming ownership can prevent unwanted surprises down the road. But surveys do carry a hefty fee, adding anywhere from $350 to $800 to the overall closing costs.8
Depending on your location, you may not be able to close on your home without the help of an attorney. This will add another line item to your closing costs, with the amount you pay varying significantly from state to state.
The above list of closing and prepaid costs may have you stressed –– and wondering how you’re supposed to keep track of all of them. Fortunately, your lender will likely organize these closing costs into an easy-to-understand list, outlining the exact amount you’ll owe. But if you want to estimate your closing costs to avoid any surprises down the road, there are a few ways you can do so:
Almost all buyers (and many sellers) deal with closing costs. Fortunately, this shared experience has produced a wealth of information regarding how to pay closing costs at the lowest price.
One of the best ways to limit your closing costs is also the best way to get a better deal on your mortgage: comparison shopping. While lenders typically recommend their providers for closing services, you can shop around to find the provider with the lowest closing costs and use others’ low closing costs to drive the price down even lower.
What if I can't afford closing costs? Another great way to keep your closing costs low is by using them as a bargaining tool. Negotiation is present at nearly every stage of the homebuying process, and closing is no different. You can negotiate with your mortgage lender to reduce your costs, or you can bargain directly with the seller to see if they’ll cover some of your costs as part of the deal.
You can also reduce your buyer closing costs by thinking strategically. Considering some of your closing costs will be prepaid and prorated, you may be able to lower your costs by choosing to close at the end of the month. If this is the case, you’ll need to think ahead to delay your closing until just the right time.9
If you’re a seller and you’re looking for another way to reduce closing costs, consider Truehold’s sale-leaseback. When you sell your home with Truehold, you avoid the traditional sale process altogether. That means that, instead of the unpredictability of various closing costs, you pay a standard 5.5 percent transaction fee. This could end up saving you money compared to regular closing costs, and it will certainly save you the stress of wondering how much your closing costs will be.
But the benefits of Truehold’s sale-leaseback go well beyond the lack of closing costs. When you sell your home with Truehold, you get your home equity in debt-free cash –– then get to continue living in your home as a renter for as little as six months or as long as you need before your next step. This gives you the added flexibility to shop for your next home, plan for your retirement, or just kick back and take it easy before making your next move.
Closing costs might seem like a pain, but they signify the end of a very important process—and the beginning of the exciting journey that is homeownership. To aid you on every step of this journey, connect with one of our advisors today.
Happy closing! Here’s to what comes next.
Sources:
Chat with a real person & get an offer for your home within 48 hours.
Call (314) 353-9757
