Closing Costs: What to Budget For

Closing costs typically run 2%–5% of the loan amount. On a $400,000 loan, that's $8,000–$20,000 due at closing, in addition to your down payment.

Geographic variation is significant. States with high transfer taxes (New York, Pennsylvania) or expensive title insurance markets push costs to the higher end. Western states tend to be lower. Your Loan Estimate will give you actual numbers for your situation.

Closing costs fall into three categories: lender fees, third-party fees, and prepaid items.

Lender fees

• Origination fee. The lender's fee for processing and underwriting your loan. Typically 0.5%–1% of the loan amount, though some lenders charge a flat fee instead. This is one of the most negotiable items.
• Discount points. Optional upfront payment to buy down your interest rate. 1 point = 1% of the loan. Only worth paying if you'll stay in the home long enough to recoup the upfront cost through lower monthly payments.
• Credit report fee. Minor, usually $25–$75.

Third-party fees

• Appraisal. Required by the lender to confirm the home is worth what you're paying. Typically $400–$700, more for larger or complex properties.
• Title search and title insurance. A title search checks for any liens or ownership disputes on the property. Title insurance protects the lender (lender's policy, required) and you (owner's policy, strongly recommended) against future claims. Combined cost is typically $1,000–$3,000, varying significantly by state.
• Escrow or settlement fee. Paid to the escrow company or attorney handling the closing. Usually $500–$1,500.
• Recording fees. Government fee to record the deed and mortgage. Usually $50–$250.
• Transfer taxes. State and local taxes on the property transfer. Varies enormously — some states have none, others charge 1–2% of the purchase price.

Prepaid items

• Prepaid homeowner's insurance. Your lender typically requires the first year's premium paid upfront at closing.
• Prepaid property taxes. Lenders often require 2–3 months of property taxes deposited into escrow at closing.
• Prepaid interest. Interest from your closing date through the end of that month. If you close on the 15th, you'll prepay 15–16 days of interest. Closing early in the month maximizes this; closing late minimizes it.

Within 3 business days of your loan application, your lender must provide a Loan Estimate — a standardized 3-page document showing your estimated rate, monthly payment, and itemized closing costs. This is your comparison tool. Get Loan Estimates from at least two or three lenders before committing.

At least 3 business days before closing, you'll receive the Closing Disclosure, which shows your final, actual costs. Compare it to your Loan Estimate line by line. Some fees are locked (can't change), others can increase by up to 10%, and some have no limit. Question anything that changed significantly.

• Negotiate with the lender. The origination fee is often negotiable. So is the rate-point tradeoff — some lenders will accept a slightly higher rate in exchange for lender credits that offset closing costs ("no-cost" loan).
• Shop title and settlement services. You have the right to choose your own title company and settlement agent. In states where this is practical, getting competing quotes can save $500–$1,500.
• Ask the seller to contribute. In buyer-favorable markets, sellers sometimes agree to cover a portion of closing costs as part of the negotiation. There are limits (usually 3–6% depending on loan type), but it's a common ask.
• Use lender credits. Trading a slightly higher rate for lender credits that cover closing costs makes sense if you won't stay long enough to recoup the rate difference. Run the break-even calculation first.