• Closing costs are fees paid to a lender and other service providers to finalize a home sale, separate from the down payment.
• These costs typically range from 2% to 5% of the total home loan amount and are paid at closing.
• Both buyers and sellers have closing costs, but the buyer is responsible for the majority of the fees.

As you prepare to buy a home, you’ll need to save for more than a down payment. Another major, though sometimes overlooked, expense is closing costs, a collection of fees that come with funding a mortgage and finalizing a property sale. These costs typically range from 2% to 5% of your loan amount and are usually paid upfront. Understanding what closing costs are and who pays closing costs can help you budget and avoid last-minute surprises at closing. 

What are mortgage closing costs?

Closing costs are fees you have to pay to take out a mortgage and finalize the sale of a home. They include fees related to your home loan, such as origination fees and any discount points, along with costs related to the real estate sale, like appraisal, title search, insurance and attorney fees. You usually pay closing costs on closing day when you sign your final loan documents. 

Closing costs vs. down payment

Closing costs are not the same as your down payment.

“A down payment and closing costs are two separate parts of buying a home, [but] many first-time buyers lump them together,” says mortgage broker Chris Cartwright. “I often explain it this way: the down payment buys the house, while closing costs buy the loan and complete the transaction.”

Here’s how they differ. 

Down payment

A down payment is a sum of money you pay upfront toward the home purchase. It goes directly into your equity, or the amount of home you own outright. Then, your lender covers the difference with your mortgage. 

You usually pay a percentage of your down payment when you submit your offer (this is known as “earnest money”). Then you’ll pay the remaining amount at closing. 

Depending on your lender, you can pay as little as 3% to 5% of the purchase price as a down payment, though putting down 20% will mean you avoid private mortgage insurance (PMI) charges. 

Closing costs

Closing costs are fees you have to pay to take out a mortgage and finalize the home sale. They go to the lender and other service providers, such as appraisers and attorneys. Your closing costs don’t go toward the equity of your home. 

They’re usually expressed as a percentage of your loan amount, rather than of the home purchase price. 

How much are closing costs?

Average mortgage closing costs range from 2% to 5% of the loan amount. Let’s say, for example, that you’re buying a $350,000 home and put down a 10% down payment, or $35,000. You’ll fund the remaining $315,000 with a mortgage. Your closing costs may range from around $6,300 to $15,750, based on that loan amount. 

Closing costs can vary a good deal based on your location, loan type and lender. Some variables include state and local taxes, property insurance and transfer and recording fees. Certain government-backed mortgages also require additional fees or insurance premiums. 

What is included in mortgage closing costs?

Mortgage closing costs include loan fees, property fees and legal fees. Here’s what is included in closing costs. 

Loan-related fees

Lenders charge various fees to process your application and fund your loan, such as: 

• Loan origination fee: This fee pays the lender for processing your mortgage. 
• Underwriting fee: Underwriting refers to the review of your finances to determine whether you qualify for a mortgage. This fee is sometimes bundled with the origination fee. 
• Application fee: Some lenders also charge a fee to cover the administrative costs of reviewing your application. 

Property-related fees

There are also fees that go into assessing the home you want to buy and verifying its condition and market value. 

• Appraisal fee: Lenders require an official appraisal to confirm the property’s market value. They can’t lend more than a property is worth. 
• Home inspection: While your lender may not require it, it’s generally wise to get a property inspected before you buy. 
• Survey fee: You may have to get the property surveyed to verify its boundary lines. 

Title and legal fees

Some title and legal fees include: 

• Title search: A title company must confirm the seller legally owns the property and there are no outstanding claims against it. 
• Title insurance: This protects both parties against any potential ownership disputes or recording errors. 
• Attorney fees: Depending on your state, you may have to pay an attorney to oversee the closing process. 

Government and recording fees

These fees vary by location, but you might have to pay: 

• Recording fees: You’ll pay this to your local government to document the transfer of ownership. 
• Transfer taxes (where applicable): Some states or counties charge transfer taxes to buy a property. 

Prepaid expenses

You’ll also prepay some taxes and insurance upfront: 

• Property taxes: You’ll often pay several months’ worth of property taxes upfront. 
• Homeowners insurance premiums: You may pay for the first year of homeowners insurance in advance. 
• Mortgage insurance premiums (if applicable): FHA home loans require upfront and monthly premiums. 
• Prepaid interest: This covers the interest that accrues after closing and before your first full mortgage payment.

Escrow funding

You may also have to contribute money into an escrow account, which is a separate account your lender will draw from to pay property taxes and homeowners insurance on your behalf. Some lenders require them, since it helps them ensure those bills are paid on time. It also simplifies your monthly payments, since you won’t have to pay those bills separately.

Who pays closing costs?

Both buyers and sellers have some closing costs they have to pay during a real estate sale. 

Homebuyers

Homebuyers pay the majority of closing costs, including loan origination fees, title fees and appraisal fees. 

Home sellers

Sellers also have some of their own closing costs, such as real estate commissions and transfer taxes in some locations. 

Can sellers help with closing costs?

It’s possible for sellers to help with closing costs for home buyers, though rare in a competitive market. In a slower market, buyers may have more power to negotiate seller concessions. 

“Seller concessions allow the seller to contribute toward a buyer’s closing costs, which can significantly reduce the cash needed upfront,” says Cartwright. “This is especially valuable for first-time buyers who may have enough for a down payment but are stretched by closing costs.”

In some cases, the seller will ask you to increase your offer price in exchange for concessions. This effectively lets you finance the closing costs with a larger home loan while the seller covers them upfront. 

Can closing costs be rolled into a mortgage?

You usually can’t roll closing costs into a mortgage when purchasing a home. However, negotiating seller concessions in exchange for a higher purchase price is a potential workaround. 

If you’re refinancing your mortgage, you often can roll many closing costs into your new loan balance. While financing closing costs can reduce your upfront expenses, it will cost you more in the long run due to a larger loan balance and increased interest charges. 

Understanding the Loan Estimate and Closing Disclosure

You’ll get two important documents before finalizing your mortgage that will help you understand your closing costs. 

Loan Estimate

Mortgage lenders must send you an official Loan Estimate within three business days after you submit your application. It will outline your loan terms, monthly payments and estimated closing costs. This is a standardized document, so you can easily compare Loan Estimates from multiple lenders. 

Closing Disclosure

This document outlines the final terms of your mortgage. Your lender must send it to you at least three business days before closing. Review it carefully so you understand your exact closing costs and can address any questions you may have. 

Ways to reduce closing costs

While you can’t eliminate closing costs, there are ways to reduce them. 

Shop around for lenders

Compare offers from multiple lenders to find one with reasonable closing costs and interest rates. According to Freddie Mac, getting one additional quote could save you $1,500 over the life of the loan, while getting five more quotes could save you $3,000.

Ask about lender credits

Some lenders will cover some of your closing costs with lender credits, but they’ll charge a higher interest rate in return. This means you’ll have a higher monthly payment and pay more interest over time. 

Negotiate seller concessions

In a buyer’s market, you may be able to negotiate seller credits to help with your closing costs. 

Look for first-time homebuyer assistance programs

First-time homebuyers should check out assistance programs that may help with closing costs or down payments. 

Review fees carefully

Mistakes happen, so review your documents carefully for any duplicate or unnecessary charges that are adding to your costs. 

Common closing-cost mistakes to avoid

Here are a few common mistakes to avoid as you prepare to cover closing costs and buy a home: 

• Focusing only on the down payment: Don’t forget to save for closing costs too. 
• Failing to compare loan estimates: Shopping around could save you a significant amount. 
• Ignoring prepaid expenses: Prepaid taxes, insurance and escrow funds can add up. 
• Waiting until the last minute to review your documents: Look over your documents ASAP so you have time to ask questions or request any corrections. 
• Draining your savings completely at closing: Avoid spending all your savings so you’re not financially stressed after you move into your new home. 

Pros and cons of paying closing costs upfront

Pros

• Lower loan balance: A smaller loan means more affordable monthly payments. 
• Less interest paid over time: With a smaller loan and lower interest rate, you’ll have lower long-term borrowing costs. 
• Cleaner mortgage structure: You can keep things simple if you’re not negotiating seller concessions or lender credits. 

Cons

• Higher cash needed at closing: You’ll have to pay a larger sum on closing day. 
• Can strain your emergency savings: Emptying out your savings is risky, since unexpected expenses can pop up. 
• May delay homeownership for some buyers: You may have to spend more time saving to cover both your down payment and closing costs. 

Bottom line

Mortgage closing costs are a significant expense when you buy a home, but they often take a back seat to the down payment. Planning for both can help you budget more accurately and approach closing day with confidence. Remember that closing costs can vary by lender, so shop around to find a mortgage that offers competitive rates and fees. 

Mortgage closing costs FAQs

Are closing costs included in the down payment?

No, closing costs are not included in the down payment. They’re a separate set of costs that cover fees related to finalizing the mortgage and real estate sale. 

Who pays closing costs when buying a house?

Buyers pay the majority of closing costs when buying a house, though sellers have some of their own closing costs, such as real estate agent commissions. In some cases, you can negotiate seller concessions, where the seller agrees to cover some of the buyer’s closing costs. 

Can closing costs be negotiated?

Some closing costs may be negotiable, and you can shop around with lenders to find one that offers lower closing costs. You may also be able to negotiate seller concessions. 

Can closing costs be rolled into a mortgage?

You can’t directly roll closing costs into a conventional home loan, though there’s a possible workaround. You may be able to negotiate seller credits, where the seller covers some closing costs in exchange for a higher purchase price (e.g., a larger loan amount). Some government-backed loans allow you to roll closing costs into your loan. 

What is the biggest closing cost expense?

The biggest closing cost expense varies, but some high fees include title-related charges, prepaid property taxes, homeowners insurance and loan origination fees. 

How do I estimate my closing costs before buying a home?

You can use the guideline of 2% to 5% of your loan amount to estimate closing costs or use an online closing cost calculator. After you apply for a mortgage, your lender will provide an official loan estimate that breaks down how much you’ll have to pay in closing costs.