Closing Costs Explained

Closing costs are the fees and expenses you pay to finalize a home purchase, beyond the down payment. They typically range from 2% to 5% of the purchase price, and they can add up to a surprising amount that catches first-time buyers off guard.

The major categories

Lender fees include the origination fee (0.5-1% of the loan), application fee, underwriting fee, and credit report fee. These are what the bank charges for processing your loan. The origination fee is often negotiable.

Third-party fees include the appraisal ($300-$600), home inspection ($300-$500), title search and insurance ($1,000-$3,000), survey ($300-$500), and attorney fees if required in your state.

Government charges include recording fees ($50-$250) and transfer taxes, which vary dramatically by state and locality. Some states charge over 1% of the purchase price in transfer taxes.

Prepaid items include property taxes (typically 2-6 months upfront), homeowners insurance (first year paid at closing), and prepaid interest (from closing day to the end of the month).

A worked example

On a $400,000 home with a conventional loan, closing costs might look like this: origination fee ($2,800), appraisal ($450), title insurance ($2,200), recording fees ($200), transfer taxes ($800), prepaid taxes ($2,400), prepaid insurance ($1,500), prepaid interest ($600). Total: approximately $10,950, or about 2.7% of the purchase price.

Some of these costs are negotiable, and sellers sometimes agree to cover a portion of closing costs as part of the purchase agreement. It's always worth asking.