Closing costs are one of the most common surprises in a home purchase.
A buyer may focus on the down payment and monthly mortgage payment, then realize near closing that additional fees, prepaid costs and escrow deposits are due. Sellers can also face closing costs, including transfer taxes, title-related costs, payoff charges and negotiated credits.
Freddie Mac describes closing costs as fees charged by the lender, real estate agent and other third parties involved in the transaction, including property expenses, mortgage application costs and paperwork-related charges.
Key takeaways
- Closing costs are separate from the down payment.
- Freddie Mac says buyers can often expect closing costs of 2% to 5% of the loan amount.
- Buyer costs may include lender fees, title charges, appraisal, prepaid taxes and insurance.
- Seller costs may include transfer taxes, title costs, loan payoff fees and negotiated credits.
- The Loan Estimate and Closing Disclosure are key documents.
- Buyers must receive the Closing Disclosure at least three business days before closing.
What are closing costs?
Closing costs are the fees and prepaid expenses needed to complete a real estate transaction.
For buyers, these can include loan origination charges, discount points, appraisal, credit report, title search, lender’s title insurance, owner’s title insurance where customary, escrow or settlement fees, recording fees, prepaid homeowners insurance, prepaid property taxes, escrow deposits, HOA or condo transfer fees and inspection-related fees if paid at closing.
For sellers, closing costs may include mortgage payoff charges, prorated property taxes, transfer taxes, title charges where customary, attorney or settlement fees, recording fees, negotiated seller credits, repair credits and other contract-specific costs.
Who pays what depends on local custom, contract terms, loan type and negotiation.
How much are buyer closing costs?
Freddie Mac says closing costs vary, but buyers can expect to pay 2% to 5% of the loan amount.
That means a buyer with a $400,000 loan might estimate $8,000 to $20,000 in closing costs, depending on the transaction. That is only a rough range. Actual costs can vary widely.
Buyers should not rely on averages alone. They should review the Loan Estimate and ask the lender or settlement agent to explain each item.
Closing costs vs. cash to close
Closing costs are not the same as cash to close.
Cash to close is the total amount a buyer needs to bring to closing. It may include down payment, closing costs, prepaid expenses, escrow deposits and adjustments.
A buyer may have a $40,000 down payment and still need several thousand dollars more for closing costs and prepaids.
The Loan Estimate
The Loan Estimate is one of the most important buyer documents.
The CFPB says buyers can use the Loan Estimate to review loan terms, estimated monthly payments and estimated closing costs, and to compare loan offers from different lenders.
Buyers should compare interest rate, APR, monthly payment, cash to close, lender fees, points, credits, escrow items and whether the rate is locked.
The Closing Disclosure
The Closing Disclosure is the final version of the loan and closing-cost details.
The CFPB says the lender must provide the Closing Disclosure at least three business days before closing. The three-day window gives buyers time to compare final terms and costs with the Loan Estimate and ask questions before closing.
Buyers should review loan amount, interest rate, monthly payment, closing costs, cash to close, escrow setup, prepayment penalty if any, balloon payment if any and all fees.
Can sellers pay buyer closing costs?
Yes, in many transactions sellers can agree to pay some buyer closing costs through a seller credit or concession.
This can help buyers who have enough income to handle the monthly payment but need help with cash to close. However, seller credits may be limited by loan type, down payment and lender rules.
What this means
Closing costs should be part of the homebuying budget from the beginning.
Buyers should ask lenders for Loan Estimates, compare offers, get insurance quotes early and preserve cash beyond the down payment. Sellers should estimate their net proceeds before listing and understand how credits or concessions affect the final result.
FAQ
What are closing costs?
Closing costs are fees and prepaid expenses required to complete a home purchase or sale.
How much are closing costs?
Freddie Mac says closing costs vary, but buyers can often expect 2% to 5% of the loan amount.
Are closing costs separate from the down payment?
Yes. Closing costs are separate from the down payment. Cash to close may include both.
When do buyers see final closing costs?
The CFPB says lenders must provide the Closing Disclosure at least three business days before closing.
Can sellers pay buyer closing costs?
In many transactions, yes. Seller-paid closing costs are negotiated and may be subject to lender and loan-program limits.
Sources
- Freddie Mac What Are Closing Costs?
- Freddie Mac Closing Your Home Purchase
- CFPB Loan Estimate Explainer
- CFPB What Is a Closing Disclosure?
- CFPB Closing Disclosure Explainer
- CFPB Review Documents Before Closing
