Buyer’s Closing Costs Explained: What to Expect When Purchasing a Home

Buying a home is an exciting milestone, but navigating closing costs can feel a bit daunting at first. Understanding what to expect ahead of time can help you feel more prepared and in control. In this guide, we’ll break down what closing costs are, how much they generally cost, and what each fee covers so you know exactly what to expect.

What Are Closing Costs?

Closing costs are fees and expenses required to finalize your home purchase. They cover services like home appraisals, title searches, title insurance, loan processing requirements, taxes, escrows, government recording fees, and the broker’s fee. These costs ensure that your home purchase is legal and financially secure.

How Much Are Closing Costs?

Closing costs typically range from 2% to 5% of the home’s purchase price. For example, if you’re buying a $400,000 home, you can expect to pay between $8,000 and $20,000 in closing costs. The exact amount depends on your lender, location, and loan type.

Who Pays Closing Costs?

In most cases, buyers are responsible for the majority of closing costs, but sellers may agree to cover part of them as a negotiation strategy. Your real estate agent will help negotiate these terms with the seller when making an offer.

Breakdown of Buyer’s Closing Costs

The most common closing costs and what each one covers:

Mortgage Loan-Related Fees

If you’re financing your home with a mortgage, you’ll have some lender-related fees, including:

Loan Origination Fee: A fee charged by your lender to process your mortgage. This is usually 0.5% to 1% of the loan amount.
Credit Report Fee: Covers the cost of pulling your credit report, usually around $30 to $50.
Discount Points: An additional one-time, upfront payment that buyers can choose to purchase to lower their mortgage interest rate. One point typically costs 1% of your loan amount.
Underwriting Fee: A fee for the lender’s team to review and approve your loan, usually $400 to $900.

Title and Escrow Fees

These fees protect your homeownership rights and ensure a smooth transaction.

Title Search Fee: Checks for liens or disputes on the property’s ownership. Costs $200 to $500.
Title Insurance: Protects you from ownership disputes or fraudulent claims. Costs vary but typically range from $500 to $3,500.
Escrow Fee: Covers the cost of a neutral third party managing the funds and paperwork. This fee is usually $500 to $2,000.

Government and Recording Fees

These are required to officially register your home purchase with local government offices.

Recording Fees: Charged by your local government to document the transfer of ownership, usually $50 to $250.
Transfer Taxes: Some cities charge a small tax on the property sale, which can range from 0.1% to 2% of the home’s price.

Home and Property-Related Costs

These fees ensure your new home is safe, structurally sound, and valued correctly.

Appraisal Fee: Required by lenders to confirm your home’s market value, usually $300 to $600.
Home Inspection Fee: A professional home inspection identifies any issues before you buy. Costs range from $300 to $700.

Prepaid Costs (Ongoing Homeownership Expenses)

These are upfront payments for future costs related to your home.

Property Taxes: Most lenders require buyers to prepay a few months of property taxes at closing.
Homeowners Insurance: Lenders typically require buyers to pay the first year’s premium upfront.
Mortgage Interest: Covers the interest on your loan from closing day until your first mortgage payment.

How to Reduce Closing Costs

Closing costs certainly add up, but there are several ways to lower them:

Negotiate with the seller: Your agent will ask if they’re willing to cover some of your closing costs as part of the deal.
Shop around for lenders: Different lenders charge different fees, so comparing offers can save you money. A great real estate agent will help you shop for this as well!
Ask about lender credits: Some lenders offer credits in exchange for a slightly higher interest rate, reducing your upfront costs.
Look for first-time homebuyer programs: Many states offer grants or assistance to help with closing costs.

Final Thoughts

Understanding the closing costs ahead of time can help you budget wisely, avoid surprises, and feel confident in your purchase. Your lender and real estate agent will guide you through the process, ensuring everything is transparent and manageable.