Understanding how to break down closing costs helps homebuyers prepare for one of the largest expenses in any real estate transaction. These fees typically range from 2% to 5% of the home’s purchase price. On a $400,000 home, that’s $8,000 to $20,000 due at the closing table.
Many first-time buyers focus solely on the down payment. They’re caught off guard when the settlement statement arrives. This guide explains each closing cost category, shows how to calculate total expenses, and offers practical strategies to reduce these fees.
Key Takeaways
- Closing costs typically range from 2% to 5% of your home’s purchase price, meaning $8,000 to $20,000 on a $400,000 home.
- A complete closing costs breakdown includes lender fees (origination, underwriting, credit report) and third-party fees (appraisal, title insurance, attorney fees).
- Request Loan Estimates from at least three lenders and compare each closing costs breakdown line by line to identify the best deal.
- Negotiate with sellers to cover 2% to 3% of closing costs, especially in a balanced market.
- Close near month’s end to reduce prepaid interest charges and review your Closing Disclosure carefully for errors before signing.
What Are Closing Costs?
Closing costs are fees paid when a real estate transaction is finalized. Both buyers and sellers pay closing costs, though buyers typically shoulder the larger share. These expenses cover services required to complete the home purchase, from loan processing to title verification to government recording.
The closing costs breakdown includes two main categories: lender-related fees and third-party fees. Lender fees go directly to the mortgage company. Third-party fees pay for services from title companies, appraisers, attorneys, and government agencies.
Buyers receive a Loan Estimate within three business days of applying for a mortgage. This document provides an initial closing costs breakdown. A Closing Disclosure arrives at least three days before settlement. It shows final numbers for every fee.
Why do closing costs exist? Each fee pays for a specific service. The appraisal fee covers the property valuation. Title insurance protects against ownership disputes. Recording fees pay the county to document the sale. Nothing on the list is arbitrary, each line item represents work performed or protection provided.
Common Closing Costs Explained
A complete closing costs breakdown requires understanding what each fee covers. Here’s what buyers should expect.
Lender Fees
Origination Fee: This covers the lender’s cost to process the loan. It’s typically 0.5% to 1% of the loan amount. On a $320,000 mortgage, expect $1,600 to $3,200.
Discount Points: Buyers can pay upfront to lower their interest rate. One point equals 1% of the loan amount and usually reduces the rate by 0.25%. This makes sense for buyers planning to stay long-term.
Underwriting Fee: The lender charges this to evaluate the borrower’s financial profile. Fees range from $400 to $900.
Credit Report Fee: Lenders pull credit reports from all three bureaus. This costs $30 to $50.
Third-Party Fees
Appraisal Fee: A licensed appraiser determines the home’s market value. Single-family home appraisals cost $300 to $600.
Title Search and Insurance: The title company researches property records to confirm clear ownership. Title insurance protects against future claims. Buyers pay $1,000 to $3,000 depending on the purchase price and location.
Attorney Fees: Some states require real estate attorneys at closing. Fees range from $500 to $1,500.
Home Inspection: While technically a pre-closing expense, inspections cost $300 to $500 and are essential before finalizing any purchase.
Escrow Deposits: Lenders require buyers to prepay property taxes and homeowners insurance. These deposits fund the escrow account that covers future payments.
Recording Fees: County governments charge $50 to $250 to record the deed and mortgage.
How To Calculate Your Total Closing Costs
Calculating a closing costs breakdown starts with the purchase price. Multiply it by 2% and 5% to establish a realistic range.
Example Calculation:
- Purchase price: $350,000
- Low estimate (2%): $7,000
- High estimate (5%): $17,500
Location matters significantly. States with higher transfer taxes push closing costs toward the upper range. New York, Delaware, and Washington have some of the highest rates. States like Missouri and Indiana tend to fall on the lower end.
Loan type also affects the closing costs breakdown. FHA loans include an upfront mortgage insurance premium of 1.75% of the loan amount. VA loans charge a funding fee ranging from 1.25% to 3.3%. Conventional loans avoid these specific charges but may include private mortgage insurance if the down payment is below 20%.
Here’s a practical approach to calculating closing costs:
- Request Loan Estimates from at least three lenders
- Compare each closing costs breakdown line by line
- Ask lenders to explain any fees that seem unclear
- Research average costs in the specific county and state
- Add 10% to the highest estimate as a buffer
The Closing Disclosure provides the final closing costs breakdown. Buyers should compare it against the original Loan Estimate. Federal law limits how much certain fees can increase between these documents.
Tips To Reduce Your Closing Costs
Buyers have more control over closing costs than many realize. These strategies can save thousands.
Shop Multiple Lenders: Lender fees vary widely. Getting quotes from three to five lenders reveals who charges reasonable origination fees and who doesn’t. This single step often saves $1,000 or more.
Negotiate With the Seller: Sellers can contribute toward buyer closing costs. In a balanced market, asking the seller to cover 2% to 3% of closing costs is common. The closing costs breakdown stays the same, the seller just pays part of it.
Choose Your Own Title Company: Buyers can select their title insurance provider in most states. Comparing quotes from two or three companies often reveals significant price differences.
Skip the Points: Unless planning to keep the mortgage for seven years or longer, discount points rarely pay off. Buyers should run the break-even calculation before paying upfront for a lower rate.
Close at Month’s End: Per diem interest charges accumulate from the closing date until the first full month begins. Closing on the 28th instead of the 5th reduces prepaid interest significantly.
Ask About Lender Credits: Some lenders offer credits that offset closing costs in exchange for a slightly higher interest rate. For buyers short on cash at closing, this trade-off makes sense.
Review the Closing Costs Breakdown Carefully: Errors happen. Check every line item on the Closing Disclosure. Question anything that looks wrong or wasn’t previously disclosed.