Closing Costs: What to Know Before You Buy Your Home

During the home buying process, there will probably be a few large numbers swirling around in your head, like how much to save for a down payment and how much your future monthly mortgage payment may be. 

There’s another number you may want to add to the mix: closing costs. These are a little harder to predict than a monthly mortgage payment (we explain why below). Yet closing costs can be as important when looking at houses as mortgage payments, because they could add up to thousands of dollars. But – bright spot alert – you may not have to pay for all of them.

Clear as mud? Yeah, for us too, so we dug in. Below, we try to end some of the mystery of closing costs by going over the basics. 

What are closing costs?

Closing costs are fees lenders, title agents, closing attorneys and others folks who need to be involved charge to process a mortgage and the sale of the home. They can be 2% to 5% of the home’s purchase price.  

If your new home costs $400,000, closing costs could be anywhere from $8,000 to $20,000 . That's a pretty big range, but it's because the exact costs will depend on several factors, like your location, lender and loan.

What do closing costs generally include?

While this isn’t a full laundry list of what to expect (ask your realtor, lawyer and/or lender for the full details), these are some of the fees you will probably see.

Loan-related fees

If you plan on getting a mortgage, closing costs pay for the lender’s work to initiate, review and process your loan. Your lender will provide a Loan Estimate or Closing Disclosure form which will include loan information – like your monthly payment – as well as: 

• Application fee/Origination fee: Some lenders charge this fee to set up and process loan applications. 
• Appraisal fee: Most lenders require an appraisal to verify a property’s value and that it is in line with the sales price.
• Credit-report fee: This covers the costs for a report of your credit score and history.

The disclosure form may also include some of the fees we list further down. (If you’d like a preview, the Consumer Financial Protection Bureau has this example.)

Is there wiggle room? Maybe. Some fees, like the origination fee, may be avoidable or negotiable. Others, like the appraisal and credit-report fee, are often needed to process a loan.

Any other lender fees to be aware of? Your lender may also set up an escrow account to hold about two months of property taxes and homeowner’s insurance premiums. If they do, these will also be due at closing, increasing the amount of money you’ll want on hand.

Third-party fees

Even without a mortgage, you may still be on the hook for closing costs, because they also include fees for services that may be required (or recommended) before you purchase your home. They could include these three: 

• Inspection fees: This covers things like property and structural inspections to verify the home’s condition. 
• Personal attorney expenses: Some states may require you use an attorney for home loan transactions. 
• Title search and insurance: This fee covers the work required to ensure there are no other claims of ownership on the home, and your ongoing insurance against future claims to your property.