While most buyers expect to bring funds to closing for a down payment, closing costs are often an unexpected expense. Closing costs are the fees required to complete your home purchase and vary by loan type, loan amount, and location. These costs can include lender charges such as origination fees and discount points, prepaid taxes and insurance, and fees associated with transferring ownership of the property.
In this guide, we’ll break down what closing costs are, what’s included in them, how they vary by loan type, and proven ways to reduce the fees—everything borrowers need to know to be prepared.
What Are Closing Costs?
Closing costs are the fees and expenses required to finalize your mortgage and transfer ownership of the home. They’re paid at the closing appointment, when you sign your final loan documents and receive the keys.
Most buyers pay between 2% and 5% of the home’s purchase price in closing costs, though the exact amount depends on your loan type, location, and lender.
What’s Included in Closing Costs?
One of the most common questions buyers ask is “What exactly am I paying for?” Closing costs typically include a combination of lender fees, third-party fees, and prepaid items.
Lender Fees
These are fees charged by the lender for originating, processing, and approving your mortgage.
- Loan origination fee – This is the lender’s charge for creating the loan. It covers services like processing, underwriting, and funding the mortgage. Origination fees are often expressed as a percentage of the loan amount.
- Application fee – Some lenders charge an upfront application fee to cover initial administrative work, such as verifying information and ordering documentation. This fee may or may not be refundable. At Homestead, we do not charge our customers an application fee—It costs nothing to apply!
- Discount points – Points are optional fees paid at closing to reduce your interest rate. One point typically equals 1% of the loan amount. Paying points can lower your monthly payment, but it only makes sense if you plan to stay in the home long enough to recoup the cost.
- Underwriting fee – This fee covers the cost of the underwriter reviewing your financial profile, credit, income, and assets to determine whether the loan meets lending guidelines.
Third‑Party Fees
These fees are paid to outside companies involved in verifying the property and completing the transaction.
- Appraisal fee – Covers the cost of a licensed appraiser determining the home’s fair market value. Lenders require an appraisal to ensure the property is worth the amount being borrowed.
- Home inspection – While sometimes paid before closing, inspections are often grouped with closing costs. A home inspection evaluates the property’s condition, identifying potential issues with the roof, foundation, plumbing, electrical systems, and more.
- Credit report fee – Pays for pulling your credit reports from the major credit bureaus so the lender can evaluate your credit history and score.
- Title search – A title company or attorney researches public records to confirm the seller legally owns the property and that there are no outstanding liens or claims.
- Title insurance – Protects you and the lender against future disputes or errors related to property ownership. Lenders require a lender’s policy, and buyers often purchase an owner’s policy as well.
- Attorney fee – In attorney-required states, a real estate attorney prepares documents, oversees the closing, and ensures the transaction complies with state law.
- Survey fee – Covers the cost of verifying property boundaries, easements, and lot size. This is more common for certain property types or locations.
Prepaid Costs & Escrows
Prepaid items are not lender fees. They are future expenses you pay in advance at closing.
- Property taxes – Buyers may need to prepay several months of property taxes or reimburse the seller for taxes already paid.
- Homeowners insurance premium – Most lenders require the first year of homeowners insurance to be paid upfront before closing.
- Prepaid interest – Covers the interest that accrues between your closing date and your first mortgage payment. This amount varies based on the day of the month you close.
- HOA fees – If the property is part of a homeowners association, you may need to pay upfront dues, transfer fees, or prorated assessments at closing.
How Closing Costs Differ by Loan Type
Closing costs can vary depending on the type of mortgage you choose. Here’s a side-by-side breakdown of how closing costs typically compare by loan type:
Conventional Loans
- Typically moderate closing costs
- Discount points are optional
- No upfront mortgage insurance fee
- Often the lowest total fees for borrowers with strong credit
FHA Loans
- Include an Upfront Mortgage Insurance Premium (UFMIP) equal to 1.75% of the loan amount
- UFMIP can be rolled into the loan
- Slightly higher overall closing costs than conventional loans
- Designed for buyers with lower credit scores or smaller down payments
VA Loans
- No lender origination fees (capped by VA rules)
- No mortgage insurance
- VA funding fee applies (can often be financed)
- Generally some of the lowest closing costs available
USDA Loans
- Include a USDA guarantee fee (1% upfront)
- Lower interest rates
- Closing costs are often similar to FHA loans
- Designed for eligible rural and suburban buyers
How Much Are Closing Costs for Buyers?
While every situation is different, here’s a general estimate of how much buyers typically pay in closing costs:
- $250,000 home: $5,000 – $12,500
- $350,000 home: $7,000 – $17,500
- $500,000 home: $10,000 – $25,000
Your Loan Estimate, provided shortly after applying, will give you the most accurate numbers.
Can Closing Costs Be Rolled into the Loan?
Some closing costs can be financed, depending on your loan type:
- FHA, VA, and USDA loans allow certain upfront fees to be rolled into the loan
- Conventional loans typically require closing costs to be paid upfront
However, financing closing costs increases your loan balance and total interest paid over time.
How to Reduce Closing Costs
Although closing costs can feel overwhelming, there are ways to lower your out-of-pocket expenses with the right planning and guidance.
- Ask for Seller Concessions
Sellers can often pay part (or all) of your closing costs, depending on the loan type and market conditions.
- Consider a Lender Credit
Some lenders offer credits toward closing costs in exchange for a slightly higher interest rate.
- Skip Discount Points
If you don’t plan to stay in the home long‑term, paying points may not be worth it.
- Close at the End of the Month
This reduces prepaid interest, lowering the amount due at closing.
Final Thoughts: Plan Ahead for Closing Costs
Closing costs are unavoidable, but they don’t have to be overwhelming. Understanding what’s included, how costs vary by loan type, and your options to reduce them can make buying a home far less stressful.
If you’re planning to buy, reviewing your Loan Estimate early and working with a knowledgeable lender can help you avoid surprises and keep more money in your pocket.