What Are Closing Costs?

Closing costs are fees and prepaid expenses due at or near the closing of a real estate transaction. They are separate from the down payment and require additional cash. Understanding what closing costs include, how they vary, and who pays them can help you plan more realistically. This guide explains closing costs in plain language.

Closing costs are separate from the down payment

The down payment is the cash you pay toward the purchase price of the home. Closing costs are additional fees for services required to complete the transaction. According to the Consumer Financial Protection Bureau, closing costs are fees paid at closing that are separate from the down payment. Both require cash, and buyers should plan for both.

For a deeper look at the down payment itself, see our guide on how much down payment you need.

What closing costs may include

Closing costs can include a variety of fees. Common categories include:

• Lender fees, such as origination fees or application fees
• Appraisal fees, to estimate the property’s value
• Title insurance and title search fees
• Recording fees, paid to local government to record the deed
• Prepaid property taxes, held in an escrow account
• Prepaid homeowners insurance premiums
• Prepaid mortgage interest, for interest accruing before the first scheduled payment
• Survey fees, if required
• Attorney fees, in jurisdictions where an attorney is involved in the transaction
• Home inspection fees, if the buyer chooses or is required to obtain one

Not every transaction includes every fee. The specific closing costs that apply depend on the property, the lender, the location, and the terms of the transaction.

Closing costs vary by transaction and location

There is no single, definitive closing-cost percentage that applies to every transaction. Costs vary based on the loan amount, the property location, the lender, local tax rates, and the specific services required. Some jurisdictions have higher recording fees or transfer taxes than others. Some lenders charge different fees for the same service.

Rather than relying on a fixed percentage, it may be more useful to understand that closing costs are a separate category of expense that varies by transaction. When you apply for a mortgage, the lender is generally required to provide a Loan Estimate and a Closing Disclosure that itemize the expected costs. Reviewing these documents can help you understand the specific costs for your transaction.

Who pays closing costs

Both buyers and sellers typically pay closing costs, though the specific costs each party pays can vary by location and transaction. In some markets, sellers may agree to pay a portion of the buyer’s closing costs as part of the negotiation. This is sometimes called a seller concession or seller credit. Whether a seller will agree to this depends on market conditions, the property, and the terms of the offer.

A hypothetical illustration

Consider a hypothetical buyer purchasing a home for $350,000. The buyer plans a 10 percent down payment of $35,000. At closing, the buyer also pays closing costs that include a lender origination fee, an appraisal, title insurance, prepaid property taxes, and prepaid insurance. These costs are separate from the $35,000 down payment and require additional cash. This hypothetical example is intended to explain the concept and is not an affordability, qualification, or lending determination. The actual costs for any transaction will vary.

Prepaid expenses are part of closing costs

Prepaid expenses are payments made at closing for costs that will come due in the near future. Common prepaid expenses include advance property tax payments and advance homeowners insurance premiums. These are often held in an escrow account managed by the lender. Prepaid mortgage interest, which covers the interest accruing between the closing date and the first scheduled mortgage payment, may also apply.

Planning for closing costs

Because closing costs require cash beyond the down payment, buyers may wish to plan for them early in the process. Reviewing the Loan Estimate provided by the lender can help you understand the expected costs for your specific transaction. Some buyers negotiate seller credits, while others save additional cash to cover the full amount. The right approach depends on individual circumstances.

For a broader look at the total cash you may need to buy a home, see our guide on how much money you need to buy a house.

Actual closing costs are determined by the transaction

Final closing costs are determined by the specific services required, the lender, local government fees, and the terms negotiated in the transaction. Keynomic does not determine closing costs, loan terms, or whether a particular transaction will include specific fees. Consult appropriately licensed professionals for guidance on your individual circumstances.