What Is Closing Costs?
Closing costs are the fees and expenses paid when finalizing a real estate transaction, typically 2-5% of the home price. Learn what's included and how to prepare.
Definition
Closing costs are the fees, taxes, and expenses that buyers and sellers pay to finalize a real estate transaction. For buyers, closing costs typically range from 2-5% of the purchase price. On a $350,000 home, expect $7,000-$17,500 in closing costs on top of your down payment.
Common closing costs include: loan origination fees (0.5-1% of the loan), appraisal fees ($300-$600), title insurance ($500-$3,500), attorney fees, home inspection ($300-$500), recording fees, prepaid property taxes and homeowner's insurance, and private mortgage insurance premiums if putting less than 20% down.
Closing costs are often the most overlooked expense in home buying. Many first-time buyers save for a down payment and are shocked to learn they need thousands more for closing costs. Some loan programs allow you to roll closing costs into the mortgage (increasing your loan balance) or negotiate for the seller to pay a portion of your closing costs.
Real-World Example
You are buying a $400,000 home with a 10% down payment ($40,000). You budget $40,000 and think you are ready. Then you learn closing costs are $14,000: $3,200 in loan origination fees, $2,800 in title insurance, $4,500 in prepaid taxes and insurance, $1,500 in attorney fees, $500 for appraisal, $500 for inspection, and $1,000 in miscellaneous recording fees. You actually need $54,000, not $40,000. This is a common and painful surprise.
Why It Matters
Closing costs can make or break your home buying timeline. Failing to budget for them is one of the most common mistakes first-time buyers make. Before house hunting, get a loan estimate from your lender that itemizes expected closing costs. This prevents the unpleasant surprise of needing thousands more than you planned. Also, closing costs are why selling and rebuying a home within a few years usually does not make financial sense -- the transaction costs eat into any gains.
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Frequently Asked Questions
Who pays closing costs, the buyer or seller?
Both. Buyers typically pay 2-5% of the purchase price. Sellers typically pay 6-10% (mainly real estate commissions plus their share of fees). In some markets, buyers can negotiate for the seller to cover part of the buyer's closing costs.
Can closing costs be included in the mortgage?
In some cases, yes. Some loan programs allow you to finance closing costs by adding them to the mortgage balance. This means no upfront cost but a larger loan and slightly higher monthly payments.
Are closing costs tax deductible?
Some are. Mortgage interest paid at closing, property taxes prepaid at closing, and discount points are typically tax-deductible. Most other closing costs (appraisals, title insurance, etc.) are not deductible.
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