Understanding Closing Costs: What You’re Really Paying For

Buying a home is one of the biggest financial decisions you'll ever make—and while most buyers prepare for the down payment, closing costs often come as a surprise. So what exactly are they, and where does your money go?

Let’s break it down.

What Are Closing Costs?

Closing costs are the fees and charges you pay when finalizing a real estate transaction—typically 2% to 5% of the home’s purchase price. These costs are paid at the closing table, just before you officially become a homeowner.

Average Closing Costs by Purchase Price

Home Price	Estimated Closing Costs (2–5%)
$250,000	$5,000 – $12,500
$400,000	$8,000 – $20,000
$600,000	$12,000 – $30,000

What’s Included in Closing Costs?

Here’s a breakdown of the most common closing cost categories:

Loan-Related Fees

• Loan Origination Fee: Charged by your lender for processing your loan (usually 0.5–1% of loan amount)

• Appraisal Fee: Covers the cost of a professional home appraisal (~$300–$600)

• Credit Report Fee: Small fee for pulling your credit (around $30–$50)

• Underwriting Fee: For the lender's final loan approval process

Title & Legal Fees

• Title Search & Title Insurance: Ensures there are no liens or ownership disputes (~$500–$1,500)

• Attorney Fees (if applicable): Some states require an attorney to review contracts and closing documents

Prepaid Costs (Escrow & Taxes)

• Property Taxes: Usually 6–12 months prepaid at closing

• Homeowners Insurance: First year’s premium paid upfront

• Mortgage Insurance (if applicable): Required for some loans with less than 20% down

• Escrow Account Funding: Initial deposit for taxes and insurance

Other Fees

• Home Inspection Fee: Optional but highly recommended (paid before closing, ~$300–$500)

• Survey Fee: Confirms property boundaries (more common in new builds or rural areas)

• Recording Fees: Paid to your local city or county to record the deed transfer

• Transfer Taxes: A fee charged by state or local governments for transferring ownership

Who Pays Closing Costs?

In most cases:

• Buyers pay the majority of the closing costs

• Sellers cover certain fees (like agent commissions and sometimes a portion of transfer taxes)

Negotiation Tip: Buyers can sometimes ask the seller to cover part of their closing costs as part of the purchase offer—especially in a buyer's market.

How to Prepare for Closing Costs

1. Ask for a Loan Estimate early in the process

2. Budget an additional 2–5% of the purchase price

3. Compare lenders—some fees vary from one to another

4. Ask about discounts or waived fees, especially for first-time buyers

5. Review your Closing Disclosure (CD) before signing—this outlines all fees in detail

Final Thoughts

Understanding your closing costs means no surprises at the closing table. It also helps you budget accurately and compare lenders with confidence. If you’re planning to buy a home soon, I’d be happy to walk you through these costs and help you find a loan option that fits your budget.