Whenever you finalize a real estate transaction, be it buying a new home, refinancing a mortgage or taking out an equity-backed loan, you will encounter closing costs. These are a miscellaneous collection of fees that, as the name implies, come due on closing day. For many single-family homes, closing costs can reach the thousands. So, it’s important to be financially prepared for the expense.

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Keep in mind: Closing costs can amount to 2 to 5 percent of your total mortgage loan.

What are closing costs?

Closing costs include a range of charges for services related to applying for a mortgage and finalizing a real estate sale. Some of the costs are related to the property you’re trying to buy — appraising it to verify its value and searching property records to ensure a clear title — and others are related to the paperwork involved in the transaction, including attorney fees and municipality recording fees. Still others relate to the financing: the expense of originating and underwriting the mortgage.

In home sales, closing costs are typically shared by buyers and sellers. While closing costs for sellers are often deducted directly from the home sale proceeds, buyers typically pay their portion out of pocket.

Closing costs usually require a cashier’s check (not a personal check), though wire transfers or other online-payment methods are getting increasingly common, as virtual closings have increased.

How much are closing costs?

The total tab for your closing costs depends on three key factors:

  • The price of the home
  • Its location
  • Whether you’re buying or refinancing

For 2021 (the latest year figures were available), the average closing costs for buying a single-family home were $6,905, according to real estate data firm ClosingCorp. The average closing costs for a refinance came in at $2,375.

Those costs vary widely across the country, however, partly due to tax differences. Homebuyers in Washington, D.C., for example, paid the highest average closing costs, at $29,888. Delaware and New York came in second and third, respectively, with average closing costs above $17,000. The cheapest closing costs were found in the middle of the country: Missouri ($2,061), Indiana ($2,200) and North Dakota ($2,501).

Who pays closing costs?

Most closing costs are paid by the buyer, but some are paid by the seller, such as the real estate agents’ commission. As the buyer, you might try to negotiate some of your costs into the current homeowner’s corner, such as homeowners insurance and property tax escrow deposits, flood and hazard insurance premiums and per-diem interest. (In a seller’s market, however, you might not be successful.)

Outside of these loan- and property-related costs, you might pay additional fees at closing, such as an attorney’s fee. Most real estate lawyers charge by the hour, and rates vary.

Closing costs paid by the buyer

  • Appraisal fee – Buyers pay an appraisal fee, which covers the work a licensed professional does to determine what the home is worth. The average appraisal fee for a single-family home is $352, according to HomeAdvisor. While this is considered a “closing” cost, you typically pay this well before closing day. Similarly, the buyer is responsible for the cost of a home inspection.
  • Title search – Unless you’re buying a brand-new home, your lender will have a title company search property records to ensure there aren’t any issues with the title of the home, such as a tax lien. The fee for a title search is around $300.
  • Title insurance – Lenders require borrowers to obtain title insurance in case there are issues with ownership after the sale. This policy protects the lender, and the cost is usually 0.50 percent to 1 percent of the amount you’re borrowing for your mortgage.
  • Origination fee – Lenders can charge a fee for creating the loan, which is generally equal to 0.5 percent to 1 percent or more of the amount you’re borrowing. This fee is typically baked into your loan and satisfied at the time of closing.
  • Underwriting fee – This might also be called an administrative or processing fee, and it covers the cost of evaluating and verifying your financial qualifications and eligibility. This might be a flat fee, or it could be expressed as a percentage of the loan, such as 0.5 percent of the amount you’re borrowing.
  • Points – To lower the interest rate on your mortgage, you might also opt to pay another charge known as mortgage points or discount points. Many lenders allow borrowers to pay points in exchange for a lower rate. While buying these points increases your closing costs, as you pay for them upfront, it can make a big difference in the amount of interest you’ll pay over the life of the loan.

Closing costs paid by the seller

  • Property taxes – Sellers must resolve any outstanding property taxes at the time of closing. Buyers may also have to pay some taxes upfront, depending on the state where the home is located.
  • Realtor commissions — The seller is usually responsible for real estate agent commissions, the largest part of closing costs. You may be able to negotiate a split with the buyer, but if it’s a buyer’s market the seller is often asked to cover both agents’ fees.
  • Title transfer fees — While the buyer pays for title insurance and search fees, the seller will often pay to have the title transferred from themselves to the new owner.
  • Homeowners association fees — Sellers must satisfy any outstanding HOA fees or special assessment costs at the time of closing.
  • Escrow fees — The escrow company that handles the transfer of funds and may facilitate the notary will have a fee that the seller pays.

How to calculate closing costs

If you want to do a quick estimate to figure out your maximum closing costs, calculate what 5 percent of your accepted offer is. Your closing costs may be less than that, depending on how you’ve negotiated the costs with the seller, but a 5 percent figure is likely to be the worst-case scenario.

If a buyer is financing the home purchase, they should receive a mortgage loan estimate from the lender shortly after they apply for the mortgage: It’s a standard form that estimates all the closing costs.

Three business days before closing, both buyers and sellers receive a closing statement, aka a settlement statement, from the title company or escrow company handling the sale. It’ll delineate all the closing costs involved, so they can get the funds ready.

How to lower your closing costs

While you can’t avoid paying all closing costs, there are some that can be negotiated, potentially saving you money. Here are a few tips:

  • Look for lenders that offer discounts: Consider working with a mortgage lender that doesn’t charge an origination fee, or that’ll offer you a discount. If you’re getting your mortgage at your bank, you can also try asking for a discount or fee waiver, since you’re already a customer.
  • Apply for down payment assistance: Particularly if you’re a first-time homebuyer, explore down payment assistance and grants that can help you cover closing costs.
  • Use a no-closing-cost loan: Look into a no-closing-cost mortgage  — but don’t let the name fool you. No-closing-cost loans do, indeed, still charge closing costs; they are simply roll them into the loan principal, so you’ll be paying them back, with interest, with your mortgage. Or you may be paying a slightly higher interest rate.

FAQs about closing costs

  • Before you start looking at homes, get preapproved for a mortgage so you understand how much home you can afford. That’ll give you a rough sense of how big the closing costs could be (remember, 2 to 5 percent of the purchase price).You’ll get a clearer sense of closing costs when you get your mortgage loan estimate (after you’ve formally applied for a mortgage). A number of factors, such as the type of loan, type of property, type of occupancy and your credit score can determine what your closing costs might be. Finally, shortly before finalizing your transaction, you’ll receive a closing disclosure from the closing agent, detailing all the expenses.
  • Yes, many lenders offer no-closing-cost mortgages, meaning you don’t need to pay the closing costs upfront when you buy a new home or refinance one. Instead, they’re rolled into the overall loan balance — increasing the principal — or the lender charges a higher interest rate on the loan. On the plus side, this strategy means less immediate outlay. On the downside, these loans tend to cost more over their lifetimes, because you’ll pay interest on those costs as long you have the loan.
  • The majority of closing costs are paid when you sign your purchase agreement and final loan documents at closing, though a few of the fees, such as appraisal and home inspection fees, must be paid in advance of closing day.
  • It depends on the loan type, your lender’s current volume, and how fast you send over the documentation they need to process and underwrite your application. In May 2023, it took the average borrower 43 days to close a mortgage, according to mortgage technology company ICE. Conventional loans tend to have faster closing times than government-backed products, like FHA and VA loans. New purchase loans take slightly less time than refinances.