Closing Costs Explained

Closing costs are the fees you pay to finalize your mortgage and transfer ownership of the property. They’re separate from your down payment, and they catch a lot of buyers off guard. On a $420,000 home, you’re looking at $8,400 to $21,000 in closing costs — that’s a car.

Here’s every fee you’ll see on your Closing Disclosure, what it actually pays for, and which ones you can negotiate down.

Lender Fees

Loan Origination Fee

This is the lender’s fee for processing your loan. Typically 0.5-1% of the loan amount. On a $350,000 mortgage, that’s $1,750-$3,500. Some lenders call this an “underwriting fee” or “processing fee” instead. Some advertise “no origination fee” but bake the cost into a higher interest rate. Ask for a comparison: what’s my rate with the fee, and what’s my rate without it?

Discount Points

Optional. One point = 1% of the loan amount, typically buys your rate down by 0.25%. On a $350,000 loan, one point costs $3,500 and saves roughly $55-65/month. Break-even is 4-5 years. Only worth it if you’re certain you’ll keep the mortgage that long.

Appraisal Fee

$400-$700 for a standard single-family home. More for large properties, multi-unit, or complex appraisals. You pay this upfront, usually within a week of going under contract. Non-refundable even if the deal falls through.

Credit Report Fee

$30-$75. The lender pulls a tri-merge credit report from all three bureaus. Some lenders absorb this cost, others pass it through.

Title and Escrow Fees

Title Search

$200-$400. The title company researches public records to verify the seller actually owns the property and there are no outstanding liens, judgments, or claims against it. This is not optional — your lender requires it, and you’d want it done regardless.

Title Insurance

There are two types, and the distinction matters:

• Lender’s title insurance: Required by your mortgage company. Protects the lender if a title defect surfaces after closing. You pay for it.
• Owner’s title insurance: Optional but strongly recommended. Protects you if someone shows up with a valid claim to the property — an undisclosed heir, a forged deed in the chain of title, an unreleased lien from a previous owner.

Combined cost: $500-$3,500 depending on the purchase price and your state. In some states (like Iowa), the state provides title insurance through a different system at lower cost. In most states, you can shop for title insurance — your agent or lender will suggest a title company, but you’re not required to use their recommendation.

Escrow/Settlement Fee

$500-$1,500. This is the fee the title company or escrow agent charges for managing the closing — holding funds, preparing documents, coordinating between all parties. Sometimes split between buyer and seller.

Recording Fee

$50-$250. Paid to the county recorder’s office to officially file the deed and mortgage. A fixed government fee — not negotiable.

Government Fees and Taxes

Transfer Taxes

This is where closing costs vary the most state-to-state, and it’s often the biggest surprise on the Closing Disclosure.

Some examples to illustrate how wildly these differ:

• Texas, Indiana, Idaho: No transfer tax
• California: $1.10 per $1,000 of sale price (about $462 on a $420K home), but some cities add their own — Los Angeles charges an additional $4.50 per $1,000
• New York State: 0.4% for properties under $3M. But New York City adds the “mansion tax” — 1% on properties above $1M, up to 3.9% above $25M
• Delaware: 4% total transfer tax (one of the highest flat rates)
• Pennsylvania: 2% split evenly between buyer and seller (but Philadelphia adds another 3.278%)

Who pays transfer taxes varies by local custom and negotiation. In many markets, the seller pays. In others, it’s split or falls entirely on the buyer. Your agent should know the standard practice in your area.

Prepaid Property Taxes

Your lender typically requires you to prepay several months of property taxes at closing to fund your escrow account. The amount depends on when you close relative to the tax due dates. Expect 2-6 months of prepaid taxes, which could be $1,000-$5,000+ depending on your property’s assessed value and local tax rates.

Prepaid Items and Escrow

Homeowner’s Insurance Premium

Your lender requires proof of insurance before closing. Most require the first year’s premium paid upfront, plus 2-3 months deposited into escrow. Average annual premium: $1,800-$2,500 for a standard policy, but ranges from $800 in some states to $4,000+ in hurricane or wildfire-prone areas.

Related Guides

Understanding closing costs is one piece of the puzzle. Our complete home buying guide puts closing costs in context with every other step in the process. Use our mortgage calculator to estimate your total monthly payment, and compare lender fees — origination charges vary by thousands of dollars. Don’t forget to budget for homeowner’s insurance, which is required at closing and often overlooked. First-time buyers may qualify for closing cost assistance programs.

Prepaid Interest

You’ll pay interest from your closing date through the end of that month. Close on the 1st, you pay nearly a full month. Close on the 28th, you pay 2-3 days. This is why some buyers strategically close at the end of the month — your first mortgage payment isn’t due until the 1st of the month after next, giving you a longer break before that first bill.

Escrow Deposits

Your lender establishes an escrow account to collect property taxes and insurance monthly. At closing, they’ll require an initial deposit — typically 2-6 months of taxes and insurance — as a cushion. This is a significant chunk of your closing costs but it’s money that’s going toward expenses you’d be paying anyway.

Other Fees

Attorney Fees

Some states require a real estate attorney at closing (Connecticut, Delaware, Georgia, Massachusetts, New York, North Carolina, South Carolina, and others). Even where it’s not required, hiring one is smart for complex transactions. Cost: $500-$1,500 for a standard residential closing. In states where it’s required, this isn’t optional — budget for it.

Survey Fee

$300-$700. The lender or title company may require a property survey to confirm boundaries. More common with older properties or rural land. Not always required — depends on your lender and location.

HOA Fees

If the property is in a homeowner’s association, you may owe prorated HOA dues, a transfer fee ($100-$500), and sometimes a capital contribution fee. These vary wildly by association.

Home Warranty

$350-$600 for a one-year plan covering major systems and appliances. Sometimes the seller pays for this as a negotiation sweetener. It’s not required, and the coverage is often frustratingly limited. Budget for actual repairs instead.

Which Closing Costs Are Negotiable?

More than you’d think:

• Origination fee: Absolutely negotiable. Ask the lender to reduce or waive it. Competition between lenders is your leverage.
• Title insurance: You can shop for a different title company. Rates can vary 20-30% for the same coverage.
• Escrow/settlement fee: Somewhat negotiable, especially if you’re using the same company for title and escrow.
• Home warranty: Ask the seller to pay for it.
• Seller concessions: In buyer’s markets, sellers routinely contribute 2-3% of the purchase price toward the buyer’s closing costs. FHA allows up to 6% in seller concessions. Conventional allows 3% with less than 10% down, 6% with 10-25% down.

What’s NOT negotiable: government recording fees, transfer taxes, prepaid taxes and insurance (these are fixed amounts based on your property), and the appraisal fee (set by the appraisal management company).

Strategies to Reduce Your Total Closing Costs

1. Shop your lender. The difference in lender fees between three quotes can be $2,000-$4,000. Get Loan Estimates from multiple lenders and compare the “Loan Costs” section.
2. Negotiate seller concessions. Build them into your offer — “purchase price $415,000 with $8,000 seller credit toward buyer’s closing costs.” You finance a slightly higher amount but pay less out of pocket at closing.
3. Close at the end of the month. Reduces prepaid interest charges. Closing on the 28th vs. the 3rd can save you $500-$1,000.
4. Ask about lender credits. Some lenders will cover part of your closing costs in exchange for a slightly higher interest rate. If you’re planning to refinance in a few years anyway, this can make sense.
5. Use first-time buyer programs. Many state and local programs include closing cost assistance — $3,000 to $10,000+ in grants or forgivable loans.

Frequently Asked Questions

Can I roll closing costs into my mortgage?

With FHA and USDA loans, you can finance certain fees (like the upfront MIP/guarantee fee). With VA loans, the funding fee can be rolled in. You can’t directly add other closing costs to the loan balance, but you can use seller concessions or lender credits to offset them — which accomplishes a similar result.

Are closing costs tax-deductible?

Some are. Prepaid property taxes and mortgage interest are deductible if you itemize (though the standard deduction is high enough that most buyers don’t benefit from itemizing). Points paid to lower your rate are deductible in the year you pay them. Origination fees, title fees, and most other closing costs are not deductible, but they do add to your cost basis — which reduces capital gains tax when you eventually sell.

What if I can’t afford the closing costs?

Options: negotiate seller concessions, use a lender credit (accept a higher rate in exchange for the lender covering costs), apply for down payment assistance that also covers closing costs, ask family for a gift (with a gift letter), or look at programs like Fannie Mae HomeReady which have reduced closing costs for qualifying borrowers.

When do I find out the exact closing costs?

You’ll get a Loan Estimate within 3 business days of applying, which gives you a preliminary breakdown. The final Closing Disclosure arrives at least 3 business days before closing with the exact numbers. If the final costs are significantly higher than the estimate, your lender needs to explain why — and some overages are limited by federal law.

Do closing costs differ between states?

Dramatically. The average total closing costs (including taxes) range from about $2,000 in Missouri to over $16,000 in New York and $12,000+ in Delaware and Washington D.C. Transfer taxes are the biggest variable — some states have none, others charge 2-4% of the purchase price.