Buying a house: What are closing costs and how much will this cost me?

Compared with a car, the list of fees for buying a house is much longer. In addition to property taxes and home insurance, there are various pipers that need paying (attorneys, inspectors, appraisers, etc.), fees to fetch your credit report, prorated utilities, escrow payments and more. While the interest rate on your mortgage tends to get much of the attention, it’s crucial for new homebuyers to also understand how much they’ll be expected to pay upfront toward such fees. 

All told, closing costs can generally range from 2% to 6% of the total loan amount, or roughly $7,140 to $21,420 on a $420,000 home, assuming a 15% down payment. 

Sellers also have their own closing costs, though a recent groundbreaking ruling may end up slashing them in half (more on that later). 

So let’s explore closing costs in detail—what they are, how to estimate them on virtually any property, and how you can potentially lower them in as little as a few phone calls. 

What are closing costs? 

Closing costs (aka “settlement costs”) are the fees associated with purchasing a home. They’re called “closing” costs because they’re typically due at the time of closing—along with your down payment.

Learn more: What is down payment assistance and how do you get it? 

On that note, it’s worth emphasizing that closing costs are totally separate from your down payment. These are additional fees that don’t factor into your loan or your home equity—and are just the cost of doing business. 

To illustrate, closing costs can include your closing attorney’s fees, various lender fees (collectively known as “origination fees”), the fees for your inspection and appraisal, notary fees, first-year home insurance premiums, property taxes, and more. 

Before we discuss actual numbers, here’s a more extensive list of the kinds of closing costs you may encounter. 

What is included in closing costs? 

As hinted above, the list of individual closing costs can be quite lengthy. Here are some of the most common that you’re likely to see as the buyer, along with a brief description (sellers have their own closing costs, which we’ll discuss later): 

• Loan origination fees. Lenders charge origination fees to help cover the cost of underwriting and preparing your loan. You can expect to pay around 0.5% to 1% of the loan amount in origination fees. 
• Discount points. If you agreed to pay your lender a little extra cash upfront to lower your interest rate (aka discount points), that amount will appear in your closing costs. 
• Home inspection fees. If you ordered a home inspection during due diligence, your inspector’s fees (expect roughly $300 to $500) will be part of closing costs. 
• Appraisal fees. As the name implies, the appraisal fee covers the cost of having the appraiser come by and find a fair market value for the home during due diligence. 
• Credit report fees. This covers the cost of pulling the credit reports for each borrower. 
• Private mortgage insurance (PMI) premium. If you’re making a down payment below 20%, your lender will usually require you to purchase private mortgage insurance to protect them if you default on your loan. They may also require you to make your first premium payment as part of closing costs. 
• Homeowners insurance premium. Lenders often require you to pay your first year’s premium on your homeowners insurance policy at closing. 
• Property taxes. Unsurprisingly, your local government will want their cut at closing, too. But you can take some solace knowing that your property taxes generally help to pay for your local school, library, and fire department. 
• Deed recording. This covers the cost of updating local land ownership records. 
• Title insurance. Title insurance protects your lender from financial loss if you lose your home in a title claim (i.e. someone else claims legal ownership after a sale). This is separate from owner’s title insurance, which is typically optional. 
• Notary fees. These cover the cost of notarizing certain critical documents, and can be as little as $2. 
• Prorated utility bills. Since the seller is only responsible for utilities and HOA dues right up until the closing date, you’ll be responsible for reimbursing them if they’ve already prepaid for some of those expenses. 
• Escrow funds. Finally, your lender may require you to put aside a little extra cash at closing to cover the next few months’ worth of various taxes, insurance premiums and more—a “reserve” fund, if you will. 

You may also see additional closing costs that are specific to your loan type, such a mortgage insurance premium (MIP) on an FHA home loan or a VA funding fee on a VA home loan. But if you’re starting to feel overwhelmed, just know that none of your closing costs should come as a surprise. 

How can I tell what my closing costs will be? 

Your closing costs will be listed out in a five-page document called the Closing Disclosure. By law, your lender must send you this document at least three business days before you close on your mortgage loan. 

Your Closing Disclosure also lists out helpful numbers like your loan amount, interest rate, estimated total monthly payment and more. 

Here’s a sample Closing Disclosure, courtesy of the Consumer Financial Protection Bureau (CFPB). Notice how on Page 2 you can see many of the closing costs we discussed above—and on Page 3, there’s an exact Cash to Close figure. 

If you have any questions about your Closing Disclosure, the best person to ask is your lender. 

Lastly, if you’re looking to estimate the closing costs on a home while you’re in the research stage, Zillow is your friend. The site has a handy Closing Cost Estimator—it’s only shown on recently sold properties, not those currently for sale, but you may still find it worthwhile to look at homes in your budget range in the area where you’re aiming to buy.  And if you’re looking to estimate your closing costs without a specific property in mind, Freddie Mac’s Closing Costs Calculator is the better tool to use. 

How much are closing costs? 

So, when it all adds up, how much will you be paying out-of-pocket to close on a home? 

As you can imagine, estimates for total closing costs can range by state, lender, loan type, and the size of the loan itself. But various estimates pin the average closing cost in the U.S. to roughly 2% to 6% of the loan amount, which again, would fall in the realm of ~$7,000 to ~$21,000 on a $420,000 home after a 15% down payment. 

Who pays closing costs? 

The buyer typically pays the vast majority of closing costs. 

There is, however, a small handful of exceptions. A seller’s closing costs may include: 

• Real estate agent commissions. Historically, the seller of a home has been responsible for paying a ~5% to 6% commission on the sale price, which the buyer’s and seller’s agents generally split down the middle. But this has been the center of a titanic ongoing lawsuit that may end up affecting how much you spend buying or selling your next home. We’ll touch on this in a bit. 
• Seller credits. Also known as “seller concessions,” these are buyer closing costs that the seller has agreed to cover. You’ll typically see more seller concessions in a buyer’s market, when the seller is more inclined to sweeten the deal. 
• Attorneys fees. If the seller wants their attorney present (or their state requires it), they’ll need to pay out of pocket for their billable time. 

Before we touch on how a big industry shakeup on commissions might affect closing costs, let’s touch on the most important frequently asked question of all. 

How can I lower my closing costs? 

Closing costs aren’t set in stone, and with a little due diligence, you may be able to shave hundreds—possibly thousands—off your bottom line. Here are a few strategies to consider: 

• Comparison shop lenders. Origination fees aren’t standard across the board, and some lenders may charge as little as 0.5% compared to the usual 1%. That may sound marginal, but on a $400,000 loan, a 0.5% difference in fees represents a $2,000 savings. 
• Collect multiple quotes for home insurance. The cost of homeowners insurance is rising, which also means the gap in premiums between Provider A and Provider B could be getting wider. Needless to say, a few phone calls could potentially save you $500+ on a more or less identical policy. 
• Negotiate with the seller. If the seller is motivated, you may be able to squeeze a few concessions out of them to help with closing costs, repairs etc. Ask your real estate agent if they think the seller may be open to discussion. 
• Simply ask your lender for a discount. The old adage that it never hurts to ask applies here. Even if your lender can’t offer you a direct discount, they can probably help you explore additional ways to lower your out-of-pocket costs at closing (e.g. a “no-cost closing” where they bundle your closing costs into your loan in exchange for a higher interest rate). 

How will the 2024 changes to REALTOR commissions affect closing costs? 

If you’re unfamiliar with the landmark changes happening in the real estate industry, here’s the skinny: 

Following multiple lawsuits alleging antitrust violations, in March 2024 the National Association of REALTORs (NAR) agreed to eliminate the age-old rule that forced home sellers to pay commissions to both the buyer’s agent and the seller’s agent. Once the new rules go into effect in August 2024, buyers and sellers will each pay their own agent separately. 

This could lead to buyers having one additional closing cost: your agent’s commission. But it may not be the full 3% that they’re used to, since many say the changes will introduce the ability to negotiate commissions upfront. You could pay, perhaps, 1.8% instead. 

On top of that, home prices may fall and inventory may rise now that sellers no longer have to pay an eye-watering 6% fee to cover both agents’ commission. A study by investment banking company Keefe Bruyette & Woods Inc. found that commissions could fall 30% across the board, potentially saving home buyers and sellers $30 billion per year. 

These are all just predictions, of course, but the bottom line is this: The massive update to commission structures may introduce a new closing cost (buyer’s agent fees), but could lower home prices across entire markets in a net win for both buyers and sellers. 

The takeaway

Just like buying a car, buying a home involves paying a litany of fees. Collectively these are called “closing costs,” and they can range all the way from roughly $2,000 for your lender’s origination fee down to something like $2 for the notary. 

Collectively, it’s safe to assume you’ll pay about 5% of your loan amount in closing fees, and your lender should provide a Closing Disclosure well before your actual closing day to eliminate any surprises. 

But once you conquer the final financial hurdle represented by your closing costs, the keys to your home will be yours. 

For more on the exact numbers you should bear in mind, check out our piece on how to save money for a house (and how much). 

Frequently asked questions

Do closing costs include your down payment?

While your down payment is still due at closing, most lenders, REALTORs and attorneys would not consider it to be part of your closing costs.

Are closing costs tax deductible?

Most closing costs are not tax deductible. The two exceptions are discount points and any property taxes you pay in advance. For more details, ask your lender. But be aware that anything you do have the option to deduct, you’ll only be able to take advantage of if you itemize, and many people are better off taking the standard deduction.

What if I can’t afford closing costs?

If you can’t afford your closing costs, there are still options available. You can try to negotiate with your lender or the seller, lower your down payment to have more funds to put toward closing costs, explore first-time homebuyer programs in your area, or even consider a no-closing-cost mortgage in exchange for a higher interest rate.