Homebuying

Closing Costs Explained

A complete breakdown of every fee you will encounter at closing and strategies to reduce your out-of-pocket costs.

NMHL Team2026-01-0910 min read

What Are Closing Costs?

Closing costs are the fees and expenses paid at the closing of a real estate transaction beyond the purchase price of the property. These costs cover services provided by lenders, title companies, government agencies, insurers, and other parties involved in the transaction. Closing costs typically range from 2-5% of the purchase price, meaning a $300,000 home purchase might carry $6,000-$15,000 in closing costs. Understanding each component helps you budget accurately and identify opportunities to reduce your out-of-pocket expenses.

The average buyer pays approximately 3-4% of the purchase price in closing costs. On a national average home price of $400,000, that is $12,000-$16,000.

Detailed Cost Breakdown

Closing costs include lender fees like origination charges (0.5-1% of the loan), appraisal fees ($350-$600), credit report fees ($30-$50), and underwriting fees ($400-$900). Title costs include title search ($200-$400), title insurance ($500-$2,000), and settlement or closing fees ($500-$1,500). Government fees include recording fees ($50-$250) and transfer taxes which vary widely by location. Prepaid items include homeowner's insurance, property tax escrow, prepaid interest from closing to end of month, and possibly flood insurance if required. These costs are itemized on your Loan Estimate and Closing Disclosure documents.

Key Tips

  • Review your Loan Estimate carefully and compare it to the Closing Disclosure for any unexpected increases
  • Ask about each fee you do not understand as some may be negotiable
  • Title insurance is a one-time cost that protects you for as long as you own the home

Who Pays What?

The division of closing costs between buyer and seller varies by location and is often negotiable. Buyers typically pay lender fees, appraisal, credit report, prepaid items, and their portion of title insurance. Sellers typically pay real estate agent commissions, transfer taxes in some areas, and their title insurance policy. In many markets, sellers may agree to pay a portion of the buyer's closing costs as part of the negotiation. FHA allows sellers to contribute up to 6% of the sale price, conventional loans allow 3-6% depending on down payment, and VA loans allow up to 4% in seller concessions.

Negotiating seller-paid closing costs is one of the most effective ways to reduce your cash needed at closing, especially in buyer-friendly markets.

Strategies to Reduce Closing Costs

Several strategies can help lower your closing costs. Negotiate seller concessions as part of your purchase offer. Shop for title insurance and settlement services as these are not tied to your lender. Ask your lender about no-closing-cost options where fees are absorbed into a slightly higher rate. Compare Loan Estimates from multiple lenders since origination fees vary significantly. Look into closing cost assistance programs in your area. Time your closing date to the end of the month to reduce prepaid interest charges. Some lenders offer credits for direct deposit setup or other banking relationships.

Key Tips

  • Closing at the end of the month minimizes prepaid interest charges
  • You have the right to shop for title and settlement services listed in Section C of your Loan Estimate
  • Ask your lender if they offer a rate that includes a lender credit to offset closing costs
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Related Guides

First-Time Homebuyer Guide

Comprehensive guide covering the entire homebuying process.

Down Payment Assistance Guide

Some DPA programs also help with closing costs.

Mortgage Pre-Approval Guide

Pre-approval gives you a Loan Estimate with closing cost details.

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Frequently Asked Questions

Budget 2-5% of the purchase price for closing costs. On a $350,000 home, that is $7,000-$17,500. Your Loan Estimate from the lender will provide a detailed breakdown of expected costs specific to your transaction.

In some cases, yes. VA loans allow the funding fee to be financed. FHA loans allow the upfront mortgage insurance premium to be financed. Some lenders offer no-closing-cost options that roll fees into the loan balance. However, this increases your loan amount and total interest paid.

Some closing costs are tax deductible, including mortgage interest, property taxes, and discount points paid on a purchase loan. Origination fees, appraisal fees, and title insurance are generally not deductible. Consult a tax professional for guidance specific to your situation.

Related Resources

First-Time Homebuyer Guide

Comprehensive guide covering the entire homebuying process.

Down Payment Assistance Guide

Some DPA programs also help with closing costs.

Mortgage Pre-Approval Guide

Pre-approval gives you a Loan Estimate with closing cost details.

Conventional Loans

Conventional loans are not backed by government agencies and typically offer the most flexibility for qualified borrowers. With options for as little as 3% down and the ability to cancel mortgage insurance, conventional loans are ideal for borrowers with good credit.

FHA Loans

Federal Housing Administration (FHA) loans are government-backed mortgages designed to help first-time homebuyers and those with less-than-perfect credit achieve homeownership. With lower down payment requirements and flexible credit guidelines, FHA loans make homeownership accessible to more Americans.

VA Loans

VA loans are a benefit earned by veterans, active-duty service members, and eligible surviving spouses. Backed by the Department of Veterans Affairs, these loans offer unmatched benefits including no down payment, no mortgage insurance, and competitive rates.

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