What Are Closing Costs?

Key Takeaways:

• Closing costs are fees you pay at the end of a home-buying process or a real estate transaction.
   
• Closing costs are usually between 2% and 5% of the home’s price.
   
• Closing costs cover services like home insurance, inspections, attorney fees, escrow fees, property taxes and etc.
   
• You can lower some costs or ask the seller to help.
   

A common mistake in buying a house is that the costs stop at the overall loan amount and the amount of monthly payments. But that is 100% not the case. There are still costs to consider when the home-buying process is at the end.

These are the fees you pay to make the home officially yours, and they are part of the process, which you cannot avoid no matter what. And unfortunately, they are not in small amounts.

This article will explain what type of costs you are going to encounter at closing.

What Are Closing Costs?

Closing costs are the fees you pay at the end of the home-buying process or real estate transaction. These costs are comprised of the services of other professionals or legal documentations that are prerequisites of a formal and proper real estate transaction.

These fees are not included in the price of the home, so you’ll need to budget for them separately.

Who Pays Closing Costs?

The buyer, seller or both can pay the closing costs. When a seller agrees to pay for the closing costs, this is called a seller concession, and it can happen during the negotiation if the seller wants to make the deal more attractive to potential buyers.

There are also times when your lender may offer a credit to help with closing costs. But that may mean accepting a slightly higher interest rate on your loan.

So while you’ll likely pay the bulk of the costs, there are ways to reduce how much you owe — we’ll talk more about that later.

What’s Included in Closing Costs?

Here are the most common fees you might see:

1. Loan Origination Fee

This is what the lender charges to start and process your loan. It helps cover the work of getting your mortgage set up.

2. Appraisal Fee

Before you can get a loan, the lender wants to make sure the home is worth the price. They hire a professional to check the value — that’s called an appraisal.

3. Home Inspection Fee

You pay an inspector to check for problems in the home — like plumbing, roofing, or electrical issues. This helps you avoid surprises later.

4. Title Insurance

This protects you (and the lender) in case someone else claims they own the home after you buy it. It's a one-time cost.

5. Escrow Fees

An escrow company handles the money and paperwork during the sale. They make sure everything is done fairly. Their service comes with a fee.

6. Recording Fees

When you buy a home, it has to be recorded with the government to show you’re the new owner. There’s a fee to make it official.

7. Prepaid Taxes and Insurance

Sometimes, you’ll pay part of your property taxes and homeowner’s insurance upfront. These costs are added into your closing total.

8. Attorney Fees (In Some States)

In some places, an attorney is required to handle the legal parts of the sale. If so, this will be part of your closing costs.

How Much Will I Need to Pay?

Closing costs usually range from 2% to 5% of the home’s price. That means if your home costs $250,000, your closing costs might be between $5,000 and $12,500.

The amount you pay depends on:

• Your loan type
   
• Your location
   
• Your lender
   
• The services used
   

You won’t have to guess though — your lender will give you clear estimates.

Can I Lower My Closing Costs?

Yes! Here are some smart ways to keep them as low as possible:

1. Negotiate with the Seller

You can ask the seller to pay part of your closing costs. Some may say yes to help close the deal faster.

2. Shop Around

You don’t have to use the lender’s preferred services. You can compare prices for title companies, inspectors, or insurance to save money.

3. Use First-Time Buyer Programs

Many local or state programs offer help with closing costs for new buyers. Ask your real estate agent or lender about what’s available.

4. Ask About Lender Credits

Some lenders will reduce your upfront closing costs in exchange for a slightly higher interest rate. This could work if you’re short on cash now but plan to refinance later.

When and How Do I Pay Closing Costs?

Closing costs are usually paid on closing day, when all the paperwork is signed and the home becomes yours. You’ll get a final number a few days before closing, so there are no surprises.

You’ll typically bring a cashier’s check or send a wire transfer for the exact amount. Your lender will give you two important documents:

• The Loan Estimate (early in the process)
   
• The Closing Disclosure (a few days before closing)
   

These documents will show a full breakdown of every fee you’ll pay.

What to Remember

If there is a choice that people would not pay for the closing costs, then nobody would. But that is not the reality. It is inevitable to opt not to pay these expenses because there are services and documentations needed to be paid in order for it to be legal and enforceable.

Let’s recap:

• Closing costs are extra fees you pay to finish your home purchase
   
• They usually cost 2%–5% of the home’s price
   
• They cover services like inspections, loan setup, and legal documents
   
• You can reduce them by asking assistance from the lender or negotiating
   
• You’ll pay them on closing day, just before the home becomes yours
   

If you’re ever unsure, ask your real estate agent or loan officer. They’ll walk you through each fee and help you plan ahead.

The more you understand about closing costs, the better prepared you’ll be — and that makes the whole home buying journey a lot smoother.