What Are Closing Costs?

Crystal 

Walker

Content Writer

Closing costs are the fees and prepaid expenses you pay to finalize a home purchase. They are separate from your down payment and typically run between 2% and 6% of the loan amount. On a $350,000 mortgage, that is an additional $7,000 to $21,000 due at the closing table.

Most buyers know closing costs exist. Far fewer have a clear picture of what is inside them, which ones can be negotiated, and why the number on the final paperwork is often bigger than the number they were first quoted.

Why Closing Costs Catch Buyers Off Guard

The down payment gets almost all the planning attention. Closing costs tend to show up later, and the timing is part of the problem.

Lenders are required to send you a Loan Estimate within three business days of your mortgage application. That sounds early, but most buyers have already been shopping for weeks by then, and maybe made an offer already. By the time a specific dollar figure appears on paper, you are emotionally invested. A big number at that stage hits differently than it would have back when you were just running scenarios.

There is also a terminology issue worth sorting out. Closing costs and prepaids both get collected at the closing table and both appear on your Closing Disclosure, which is why buyers tend to lump them together. They are not the same thing. Closing costs are fees for services and transactions. Prepaids are upfront deposits on ongoing ownership expenses like insurance and property taxes. The distinction matters when you are trying to understand where your cash is actually going.

One thing that helps: ask a lender for a ballpark estimate before you start making offers. Not a formal application, just a phone call. The number will be rough, but it gives you something real to build into your savings plan early enough to be useful.

What Is Actually Included in Closing Costs?

Lender Fees

These are the charges your mortgage company collects to create and process your loan.

• Origination fee: What the lender charges to set up your mortgage. Typically 0.5% to 1% of the loan amount.

• Underwriting fee: Covers the review and approval of your application.

• Credit report fee: Usually $10 to $100.

• Discount points: Optional. Each point costs 1% of the loan amount and typically reduces your rate by 0.25%. Worth considering if you plan to stay in the home long enough for the interest savings to outpace what you paid upfront.

Something worth knowing: two lenders quoting you the same interest rate can differ by hundreds or even thousands of dollars in origination and processing fees. Most buyers do not realize this until they see it on paper side by side, which is a good argument for shopping more than one lender before you commit.

Third-Party Fees

These go to outside companies involved in your transaction, separate from your lender.

• Appraisal: A licensed appraiser confirms the home's market value for the lender. Typically $300 to $500.

• Title search: Confirms the seller has clean legal ownership and no liens or competing claims in the public record.

• Title insurance (lender's policy): Protects your lender if an ownership dispute surfaces after closing. Required on almost every mortgage.

• Owner's title insurance: Protects you. Optional in most states, but worth having. In many markets sellers cover this one; ask your agent what is standard where you are buying.

• Escrow or settlement fee: Paid to whoever manages the closing, whether that is a title company or an attorney.

• Recording fees: Government charges to register the deed and mortgage. Usually $50 to $250.

• Home inspection: Not required by most lenders, but skipping it is rarely the right call. Typically $300 to $600.

Prepaids: Not Fees, But Still Due at Closing

Prepaids are not payments for closing services. They are upfront installments on costs you will owe as a homeowner regardless: insurance, property taxes, mortgage interest. Your lender collects them at closing to make sure those obligations are covered from day one.

• Homeowner's insurance: Most lenders require the first full year paid at closing.

• Property tax escrow deposit: Usually two to three months of estimated taxes, held until the bill comes due.

• Prepaid mortgage interest: Interest from your closing date through the end of that month, since your first mortgage payment does not cover those days.

If your Closing Disclosure comes in higher than your Loan Estimate, this is almost always the reason. The fees did not change. The prepaids just got calculated once your actual closing date was confirmed.

How Much Are Closing Costs?

The planning range most lenders use is 2% to 6% of the loan amount. A 2025 report from LodeStar Software Solutions put the national average at $4,661 before prepaids, roughly 1.06% of the average sales price. Add prepaids and state transfer taxes and your real out-of-pocket is typically higher.

A few things that move your specific number:

Where you buy. State transfer taxes account for most of the variation between states. Delaware buyers pay close to 3% of the purchase price in closing costs. Buyers in states without a transfer tax often land under 1%. County-level fees add another layer on top of that in some areas.

Your loan type. FHA loans include a 1.75% upfront mortgage insurance premium, paid at closing or rolled into the loan. VA loans carry a one-time funding fee for purchase loans ranging from 1.25% to 3.3%, depending on your down payment and whether you have used the benefit before; veterans with a qualifying service-related disability may be fully exempt. Conventional loans skip both of those but have their own fee structures. If you are comparing loan options, ask your lender to run a side-by-side cost comparison before you decide.

Your specific lender. Origination fees, processing fees, and underwriting fees are not standardized across the industry. Two lenders can quote you the same rate and differ by $1,500 or more in fees alone. The only way to know where you actually stand is to get Loan Estimates from more than one lender and compare them line by line.

For a $400,000 purchase, a working planning figure is $10,000 to $18,000 to cover closing costs and prepaids combined. That is a wide range on purpose because location, loan type, and lender all pull it in different directions. A Loan Estimate from an actual lender, for your actual situation, is the only thing that gives you a specific number.

If you are still building out the full picture of what you need saved before buying, the PrimeStreet Financing and Affordability guide gives you payment strategies, an affordability calculator, and credit tools in one place.

What Buyers Tend to Get Wrong

Saving for the down payment but not for closing costs. Both need to be liquid on closing day. A buyer who has exactly enough for a 3.5% FHA down payment is not ready to close.

Assuming most of the fees are fixed. Some are. Government recording fees and transfer taxes are set by law. But lender origination fees, title company rates, and a handful of third-party services are either shoppable or negotiable. The process does not advertise this clearly.

Waiting too long to ask. You do not need to be under contract, or even pre-approved, to ask a lender for a rough estimate. The earlier you have a real number, the more useful it is for planning.

Not knowing that sellers can help. A seller credit toward your closing costs is a standard negotiating tool, not an unusual request. Your lender sets a cap on how much the seller can contribute based on your loan type and down payment, but in a softer market it is often a realistic option worth structuring into your offer.

Not comparing the Loan Estimate to the Closing Disclosure. The Loan Estimate is a projection. The Closing Disclosure, which arrives three business days before closing, has the final numbers. Some fees are legally capped and cannot increase much. Others have more flexibility. Review both documents side by side and ask your lender to walk through any meaningful differences before you sign.

Ways to Lower What You Owe

Get Loan Estimates from at least two lenders on the same day. Rates shift daily, so same-day requests are the only way to make a fair comparison. On each estimate, focus on Section A (origination charges) and Section C (services you can shop for). Those two sections have the most room to move.

Choose your own title company. In most states you are not required to use the one your lender recommends. Ask your lender for their Affiliated Business Arrangement disclosure, then call one or two independent title companies for competing quotes. Saving a few hundred dollars takes about twenty minutes.

Build seller concessions into your offer from the beginning. In many markets, especially when homes have been sitting longer, sellers will credit buyers money at closing to keep a deal moving. It tends to land better as part of the original offer rather than as a late addition.

Look into assistance programs before ruling them out. State housing finance agencies, local housing programs, and some employers offer grants or low-interest loans specifically for closing costs. A lot of buyers skip this step because they assume they earn too much or live in the wrong area. Eligibility rules are often more flexible than people expect. A HUD-approved housing counselor can check what is available in your area at no charge.

Ask your lender to show you the lender credit tradeoff. Some lenders will cover your closing costs in exchange for a slightly higher interest rate. Whether that makes sense depends on how long you plan to stay in the home. Ask your lender to calculate the breakeven point so you can see the math before you decide.

A Closing Cost Checklist for Buyers

• Ask a lender for a rough estimate before you start making offers

• Compare Loan Estimates from at least two lenders, line by line, on the same day

• Find out whether you can choose your own title company in your state

• Ask your agent what seller concessions typically look like in your target market

• Check for state and local closing cost assistance programs

• When your Closing Disclosure arrives, compare it to your Loan Estimate and ask about any meaningful differences before closing day

You do not need to understand every line on the page. You need to know your total, know which parts have flexibility, and not wait until the week of closing to start asking questions.

Closing Costs Are Local. So Is Good Advice.

What is negotiable, what sellers typically cover, which assistance programs exist in your specific area: none of that is consistent from one market to the next. An agent who works your area regularly knows what is realistic and what is not worth asking for.

That local knowledge is part of what you are really getting when you work with someone who knows the market well, beyond the basics of finding a house.

PrimeStreet matches buyers with agents based on property type, timeline, and budget. No cost, no obligation.

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_{This article is for educational purposes only and does not constitute legal or financial advice. Costs and market conditions vary by location. Consult with a licensed real estate professional and mortgage lender for guidance specific to your situation.}