Key Takeaways
- Closing costs can be 2-5% of your loan amount.
- Shop around to save money on lender-related fees.
- Some closing costs may be negotiable with your lender.
- Borrowers may roll closing costs into their loan if allowed.
Article Summary
Closing costs are the fees and expenses home buyers pay in conjunction with getting a mortgage loan.
Closing Costs: Explained in Plain English
Closing costs are the various fees and expenses that home buyers must pay when completing a mortgage transaction. These costs are separate from the down payment.
Closing costs fall into three main categories: lender-related fees, third-party service costs, and prepaid items. Each category serves a different purpose in the home buying experience and may be negotiable to varying degrees.
For example, if a first-time home buyer purchases a $300,000 home, they might expect closing costs up to $15,000, although the actual closing cost number is usually much, much less. Closing costs are paid in addition to a down payment and are required to be paid at closing, either in cash or by rolling them into the loan amount if the lender allows.
Types of Closing Costs
Lender-Related Closing Costs
Lender-related closing costs are fees the mortgage lender charges for processing and approving your loan. These costs vary significantly between lenders, so shopping around can save you money. Here are the most common lender fees you may see:
| Fee | What It Covers |
|---|---|
| Loan origination | Lender's charge to process your loan |
| Discount points | Optional fee to lower your rate |
| Underwriting | Lender's review of your finances |
| Document preparation | Preparing your loan paperwork |
| Credit report | Pulling your credit report |
Third-Party Service Costs
Third-party closing costs go to companies or professionals outside the lender. These costs are roughly the same no matter which lender you choose, though you may be able to shop around for some services. These are typical services you may pay for:
| Fee | What It Covers |
|---|---|
| Appraisal | Professional home value estimate |
| Title search/insurance | Check and insure property ownership |
| Escrow | Escrow agent's services |
| Attorney | Legal review (some states) |
| Survey | Property boundary check |
| Home inspection | Professional home inspection |
Prepaid Items
Prepaid items are costs you pay upfront at closing that cover future expenses. These costs are based on when you close during the year, not which lender you choose. Here are the main prepaid items:
| Item | What It Covers |
|---|---|
| Property taxes | Taxes for the current period |
| Homeowners insurance | First year of insurance paid at closing |
| Mortgage insurance | Upfront premium for FHA or other insurance |
| Escrow account funding | Initial deposit for taxes and insurance |
How Much Are Closing Costs
Closing costs vary by loan type, with conventional loans typically having the lowest costs and government-backed loans often requiring higher upfront expenses.
Based on 2024 mortgage data, here's what home buyers can expect to pay:
| Loan Type | Typical Fees Included | Average Closing Costs |
|---|---|---|
| Conventional | Appraisal, lender fees, title | 1.54% of loan amount |
| FHA | Upfront MIP, appraisal, lender fees | 3.77% of loan amount |
| VA | VA funding fee, appraisal, title | 1.97% of loan amount |
| USDA | Guarantee fee, appraisal, lender | 3.42% of loan amount |
| All Types | Varies | 2.06% of loan amount |
Conventional loans typically have the lowest closing costs because they don't require upfront mortgage insurance premiums. FHA loans have higher closing costs due to the upfront mortgage insurance premium (UFMIP) that's typically financed into the loan amount.
VA loans often have lower closing costs because veterans may not pay certain fees that other borrowers face.
USDA loans have higher closing costs similar to FHA loans due to their upfront guarantee fee.
For a $300,000 home purchase, these percentages translate to:
- Conventional: $4,620 in closing costs
- FHA: $11,310 in closing costs
- VA: $5,910 in closing costs
- USDA: $10,260 in closing costs
Keep in mind that these are averages and your actual closing costs may vary based on your specific situation, location, and lender.
Common Questions About Closing Costs
Frequently asked questions about closing costs and how they work in home buying.
How much should I expect to pay in closing costs?
Can I negotiate closing costs?
What's the difference between closing costs and the down payment?
Can I roll closing costs into my mortgage?
Are there any closing costs I can avoid?
How do I get an accurate estimate of my closing costs?
Common Closing Costs Questions
Homebuyers frequently ask these questions about closing costs. Select a topic to learn more.
Closing Costs Basics
- What am I actually paying for in closing costs?
- Why are closing costs so high? What are the biggest buckets that drive them?
- What's the difference between lender fees and third-party fees?
- Is the origination fee always negotiable, or is that fixed?
- Why is my cash-to-close so high?
- Why does my cash-to-close keep changing every time I get an updated estimate?
- How do I read a Closing Disclosure to spot what changed from the Loan Estimate?
- Why is my closing date dependent on the lender instead of the contract?
Escrow Questions
- Why can my payment change after closing?
- What's the point of an escrow account? Why can't I just pay taxes myself?
- What's the difference between escrow waiver and escrowed taxes/insurance?
- How does a servicer calculate an escrow payment after closing?
- My escrow is short -- who's right, me or the servicer?
- What does "escrow shortage" mean, and why am I being billed for it?
- My payment includes escrow -- why does that make my monthly look so much higher?
- Why can my mortgage payment go up after closing if my rate is fixed?
- Why does my servicer estimate my taxes differently than my county bill?
Title & Insurance
- What is title and why does it take so long to clear?
- What's a title search and what kinds of issues can it find?
- Why am I paying for title insurance, and what does it actually cover?
- Is owner's title insurance required, or just lender's title insurance?
- Is it normal for homeowners insurance to be this expensive?
- What's the difference between a home warranty and homeowners insurance?
- The seller is offering a home warranty -- does that actually do anything?
Earnest Money
- Is earnest money basically "gone" once I send it?
- Is earnest money basically hostage money? How do I not lose it?
- The seller wants a big earnest deposit -- am I exposed here?
- Who holds earnest money and what rules control when it's released?
Seller Credits & Negotiations
- How do seller credit limits work depending on down payment and loan type?
- What's the difference between seller credits and a price reduction?
- Why can't the seller just give me cash instead of credits?
