You are currently viewing What Are Closing Costs?

What Are Closing Costs?

Understanding Closing Costs When Buying or Refinancing a Home

When purchasing a home or refinancing your mortgage, closing costs are one of the most important expenses to prepare for. Closing costs are the fees and expenses required to finalize your real estate transaction. They cover a wide range of services involved in transferring homeownership and securing your loan.

On average, closing costs for buyers typically range between 0.5% and 3% of the home’s purchase price on a national level, with an average near 1%, though the range can extend up to 5–6% in some regions or high-cost areas. For refinances, expect closing costs from 2% to 6% of the loan amount, depending on loan details and location.

Breakdown of Common Closing Costs

Loan-Related Costs

  • Origination Fee – Charged by your lender for processing your mortgage (usually 0.5%–1% of the loan amount).

  • Discount Points – Optional upfront payments that let you reduce your long-term mortgage interest rate.

  • Credit Report Fee – Covers the expense of pulling your credit report for loan approval.

  • Underwriting Fee – A fee charged by the lender to review and approve your loan application.

Third-Party Fees

  • Appraisal Fee – Pays for a professional appraisal to determine the home’s fair market value.

  • Inspection Fees – May include general home inspections, pest inspections, or other specialized checks.

  • Title Search Fee – Ensures the property has no outstanding liens or ownership disputes.

  • Title Insurance – Protects both the lender and (optionally) the buyer against title issues.

  • Survey Fee – Verifies property boundaries and checks for encroachments if required.

Escrow and Prepaid Costs

  • Escrow Fee – Paid to the title or escrow company overseeing the closing process.

  • Property Taxes – Typically, 2–6 months of taxes are prepaid to fund your escrow account.

  • Homeowners Insurance – The first year of your policy is usually required upfront.

  • Private Mortgage Insurance (PMI) – Required for conventional loans with less than 20% down or for FHA loans.

  • Prepaid Interest – Covers the interest from your closing date until the end of the month.

Government Fees

  • Recording Fees – Local government charges for recording the new deed and mortgage documents.

  • Transfer Taxes – State, county, or city charges for transferring property ownership, especially significant in high-tax states.

Miscellaneous Fees

  • HOA Fees – If the property is part of a homeowners association, upfront dues or transfer fees may apply.

  • Courier Fees – Covers the cost of delivering documents during the closing process.

  • Attorney Fees – In some states, an attorney is required to oversee the transaction.

What to Expect Before Closing

Early in the mortgage process, your lender will provide a Loan Estimate that outlines projected closing costs. At least three business days before closing, you’ll also receive a Closing Disclosure with the final, itemized costs. Reviewing these documents carefully can help you budget more accurately and avoid surprises at closing.

 

Note: Closing costs vary by location, lender, and transaction type. Some states and cities may have higher fees due to transfer taxes or local requirements.