What are closing costs? (2023)

How closing costs work

Closing costs are a collection of fees and expenses that homebuyers must pay to finalize their mortgage. They're typically paid at the end of the homebuying process — at your closing, when both the buyer and the seller sign legal documents to transfer property ownership. As the buyer, you’ll also sign paperwork to enter into a contractual agreement with your mortgage lender.

Closing costs are mostly made up of lender processing fees and property fees, though they include some other fees, too. They cover services like title searches and home appraisals and can also include property taxes and escrow payments for homeowners insurance premiums.

“Closing costs are dependent on many factors including credit score, how much buying power you need, how much you want to buy down your interest rate and your lender,” said real estate lending expert Michelle Taylor. “A good lender will go over each fee with you and help navigate with you from the time you apply to the closing of your loan.”

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Types of closing costs

All closing costs are listed individually on both the Loan Estimate and the Closing Disclosure documents, both of which you’ll receive at different points in the closing process. The closing costs listed usually fall into one of three categories: mortgage fees, property fees and other fees.

The lender may require fees for required services (like appraisals or pulling credit reports). Other services, like a pest inspection, may be performed by any company you choose.

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How to calculate closing costs

There are two ways to calculate your closing costs. First, you can use a closing cost calculator found on many financial websites. These calculators use local tax and fee data to give you a reasonably accurate estimate.

Another way is to estimate your closing costs with the Loan Estimate document provided by your lender. This estimates the loan amount, interest rate, monthly payment and closing costs in the beginning. When you receive the Closing Disclosure, which finalizes the loan terms, you’ll want to compare the estimated costs with the finalized costs to look for discrepancies (e.g., any new fees listed).

One important figure you’ll need to compare is the “Cash to Close” amount, which is how much you’ll have to pay at closing. Your lender will specify the methods you can use to pay (usually a cashier’s check or wire transfer). Some banks require a few days’ notice before completing a wire transfer, so you’ll want to ensure you’ve accounted for that time.

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Who pays closing costs?

The buyer typically pays for the majority of the closing costs; however, there are some expenses the seller may cover (these are called seller concessions). You can also ask for reduced closing costs from your lender or a waived application fee, but you’ll have to make those requests before you find a home and submit an offer — ideally just after you’ve received approval from multiple lenders.

If you do pursue seller concessions, note that there are limits depending on your loan type. Below are seller concession limits based on mortgage type:

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How to lower closing costs

“There are many ways to get help with closing costs,” said Taylor. “This includes government-sponsored forgivable down payment assistance programs. Realtors can [also] write offers for a seller credit to go toward that buydown and help with closing costs.” You should pursue these options earlier on in your mortgage process.

If you want the seller to pay for some of the closing costs, you’ll have to negotiate those terms when you present an offer. Your real estate agent can advise you on typical seller concessions and help you hammer out which ones are most likely to be accepted in your situation.

Finally, don’t be afraid to challenge your lender about certain closing costs. Aaron, a reviewer from Florida, said, “I noticed my closing costs were exceptionally high, and when I inquired as to [the] reason why, they were magically able to drop them by $7000 with the same interest rate.”

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Bottom line

Closing costs cover lender and property fees when you purchase real estate. The amount you’ll have to pay in closing costs depends on your lender, location and the type of mortgage. You can expect to receive a Loan Estimate and Closing Disclosure that spell out each of the costs you’re expected to pay with a new mortgage.

Usually, closing costs amount to about 2% to 5% of the home’s sale price. Buyers can negotiate with sellers to help pay for some of these costs, but there are limits to how much the seller can cover. Also, the seller could have the upper hand at the negotiation table if it’s a seller’s market. Ultimately, you’ll want to draw on the expertise of your real estate agent to decide the best plan of action for you.