Closing Costs: Definition, Types & Average Amounts

Closing costs are the extra expenses that buyers and sellers pay on top of the purchase price at settlement of a real estate transaction. Closing costs include mortgage origination fees, discount points, appraisal fees, and more. Average closing costs on the median home sales price of $230,000 are 2 percent to 5 percent, or $4,600 to $11,500.

What Are Closing Costs

There are different types of closing costs associated with buying or selling real estate. The buyer’s closing costs usually include loan origination fees, discount points, appraisal fees, and more. The majority of the seller’s closing costs are comprised of the real estate agent’s commission. Typical closing costs generally fall into one of nine categories.

1. Mortgage Origination Fees

Loan origination fees are fees charged by the bank or mortgage lender for the creation of a loan. Loan origination fees are approximately 1 percent of the mortgage amount. These fees may be negotiable depending on the risk factor of the loan and the borrower’s creditworthiness. Typically, the more collateral you provide, the more you can negotiate. The higher the borrower’s FICO score (check yours for free here), the more negotiating power the borrower usually has as well.

2. Discount Points

Discount points are another typical buyer’s closing cost that is a type of prepaid interest. The buyer can purchase discount points upfront to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are negotiable and may be covered by the bank.

3. Appraisal Fees

Appraisal fees are fees for a professional appraiser to assess the home’s value. They’re a typical closing cost for buyers. They’re generally required by lenders and cost $300 to $500 or more on average, depending on the type of property, location, and property size. Even if your lender doesn’t require it or if you’re purchasing the property using all cash, an appraisal is recommended so that you know the fair market value of the property and don’t overpay for it.

4. Title Insurance

Title insurance is a type of indemnity insurance offered by title companies that insure against losses resulting from defects in the title, such as liens, outstanding taxes, mortgages, and violations belonging to previous owners. All mortgage lenders typically require it, and a title insurance policy can go as far back as 60 years. It’s paid as a one-time fee during closing. In some states, buyers typically pay for title insurance and, in other states, sellers pay for it.

There are generally two types of policies: a lender’s policy that protects the mortgage company’s investment and an owner’s policy that protects your investment. The lender’s policy remains in effect until the mortgage is paid off, and the owner’s policy is in effect for as long as the owner owns the property.

5. Real Estate Agent Fees

Assuming the property was listed by a real estate agent, real estate agent fees are typically part of the seller’s closing costs. Typical real estate agent fees range from 2 percent to 6 percent of the property’s sale price. Generally, this pays for both the listing agent and the selling agent’s commission and is up to the listing agent how that commission is split.

6. Prepaid Costs

When the buyer gets a loan, their lender may require them to pay for some things like property taxes and homeowners or rental property insurance in advance, which are called prepaid costs. Prepaid costs are typically part of the buyer’s closing costs that need to be paid in advance when getting a loan. They may also include mortgage interest that will accrue between the closing date and month-end. The lender lists these costs in an estimate of closing costs called The Good Faith Estimate, which is given to the buyer no more than three days after applying for a loan.

7. Private Mortgage Insurance (PMI)

PMI is a buyer’s closing cost that is applied to any home purchase using a conventional loan with a down payment of less than 20 percent. PMI protects the lender from losing money if the borrower ends up in foreclosure. PMI fees vary around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score.

8. Recording Fees and Taxes

Local governments charge recording fees and taxes to record the sale of property. These transfer taxes―another term for recording fees and taxes―vary from state to state. For example, in California, the tax is assessed on any transfer that has a value of more than $100, and the rate is 55 cents for each $500 of value. In New York, the rate is $2 for each $500 on all transfers. New York has a separate mortgage recording tax, with a rate of 50 cents per $100 of value.

“Real estate transfer taxes in particular vary wildly throughout the country, with most of the highest transfer taxes being on the East Coast. For example, in Ohio, a buyer will pay up to 0.4 percent in state and county taxes but, in neighboring Pennsylvania, the state and county transfer taxes can be as high as 2.0 percent. In Maryland, state and county transfer taxes can be as much 2.0 percent, and Maryland also has a tax on the mortgage value. Some states, such as Indiana, Mississippi, Missouri, Montana, and New Mexico, have no transfer tax.”
―Elizabeth A. Whitman, Attorney, Whitman Legal Solutions, LLC

9. Other Miscellaneous Closing Costs

Sometimes, there are other typical closing costs, which depend on the state and municipality where the property changing hands is located.

Other miscellaneous closing costs can include:

• Title searches: Typically $200 to $350
• Surveys: Usually $350 to $500
• Credit report changes: $50 or more
• Notary fees: Typically $75 to $150

How to Calculate Closing Costs

Homebuyers typically pay between 2 percent and 5 percent of the purchase price of their home in closing costs. That estimate can vary quite a bit depending on the amount of the loan, the mortgage type, or even the area of the country in which you are buying or refinancing the property.

Typically, home buyers will pay about 2 percent to 5 percent of the purchase price of their home in closing fees. So, if your home costs $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.

Home Purchase Price & Average Closing Costs

Typically, your real estate agent will give you a rough estimate of your closing costs when you make an offer on a property. You can also calculate them yourself by adding up all of the fees associated with purchasing the property. Your real estate agent, title company, and lender will have access to all of these fees. Your lender will give you a more exact closing cost figure after applying for the loan and prior to settlement. If you want to calculate average closing costs yourself, you can also use a free closing cost calculator.

“When calculating closing costs, keep in mind that they vary significantly from market to market and depend on your need for different services (for example, if you need to add in attorney fees). It’s difficult to nail down an exact number, which is why there is a 2 percent to 5 percent rule of thumb for homeowners to use when searching for their potential homes.”
―Shawn Breyer, Owner, Breyer Home Buyers

Who Pays for Closing Costs

Buyers and sellers typically both pay different real estate closing costs during a transaction. The types and amounts of buyer closing costs and seller closing costs depend on a variety of factors, including the location of the property, the purchase price, and if financing is involved.

Buyer Closing Costs

Buyer closing costs are what the buyer is responsible for paying other than the purchase price of the property. These buyer closing costs generally include things like lender fees, an appraisal, transfer taxes, and more.

Typical closing costs for buyers include:

• Lender fees: 1 percent to 2 percent; these include the application fee, discount fee, processing and underwriting fees, wire transfers, credit report, etc.
• Appraisal: $300 to $500; generally paid by the buyer upfront or at closing and is required by most lenders.
• Transfer taxes: 0 percent to 2 percent; these are state- and municipality-specific taxes due to transfer the deed of the property in that location, and can be paid by buyer or seller or split between the two.
• Property insurance: $1,228 average; annual premium typically is paid in full at closing.
• Title fees: 1 percent; in some states, the buyer pays these while, in others, the seller pays them. They typically include notary fees, title search fees, and title insurance.
• Property tax reserves: Two to three or more months; this varies by municipality and lender. Most lenders require you to pay at least a few months of property taxes upfront at closing.

Keep in mind that these costs vary not only by state but also by city and, sometimes, municipality. You will notice some closing costs appear under both buyer closing costs and seller closing costs. This is because they can be paid by either one depending on the state and how the two parties negotiate the closing costs.

“Buyer closing costs vary by state. In Georgia, closing costs are defined as costs associated with getting a loan. In that regard, the buyer is responsible for 100 percent of the closing costs and the seller has zero costs. However, the buyer can negotiate to have the seller pay part of their closing costs.”
―Pam Ahern, Founder & Lead Agent, Intown Atlanta Area Homes with Palmer Properties

Seller Closing Costs

Seller closing costs are the costs that the seller is responsible for paying during the settlement of a real estate transaction. The main cost is typically the real estate commission, but other seller closing costs include property taxes and past due utility bills.

Typical closing costs for sellers include:

• Real estate commissions: 2 percent to 6 percent of the sales price; the seller generally pays these, but they may ask the buyer to pay part of them during negotiations.
• Property taxes: If the seller hasn’t already paid their property taxes, they’re responsible for all taxes up to the closing date.
• Past-due utility bills: The seller pays any utility bills up through the date of closing.
• Any liens on the property: Typically, a buyer will receive a free and clear title, which means that all liens on the property, including a mortgage, line of credit, mechanic’s lien, and so on, need to be paid from the seller’s proceeds at settlement.
• Transfer taxes: 0 percent to 2 percent; these are state- and municipality-specific taxes due to transfer the deed of the property in that location and can be paid by buyer or seller or split between the two.
• Title fees: 1 percent; again, these are fees charged by the title company and include notary fees and title insurance and can be paid by either the buyer or the seller.

A seller’s closing costs generally include paying both the buyer’s agent and the seller’s agent. Usually, that commission is split between the listing agent and the buyer’s agent. In some cases, the buyer will change the sales contract to stipulate that the seller will pay the buyer’s closing costs up to a certain percentage or set dollar amount.

Most, if not all, closing costs are negotiable. Both buyers and sellers may negotiate on who pays which fees. The buyer usually pays more line-item expenses, and the seller usually pays the commission. Again, the seller may offer to pay a portion of, or all, of the closing fees for the buyer. However, if the buyer is financing the property, the lender will have to approve the buyer’s closing cost credit.

Examples of Closing Costs in a Real Estate Transaction

The total closing costs to purchase a $300,000 house could cost a homebuyer anywhere from approximately $6,000 to $15,000, which is 2 percent to 5 percent of the property’s purchase price. Much of the variance depends on the points and origination fees a lender charges to make the loan, which is disclosed in the loan estimate. Other variables are prorated property taxes and transfer taxes.

Now, let’s look at an example of how much the seller’s closing costs would be on the same transaction.

Typically, if a seller is selling their home for $300,000, their closing costs will be made up of the real estate commission―typically 2 percent to 6 percent of the sales price―and any past-due taxes and utility bills. Depending on the state and their agreement with the buyer, they may also pay a portion of the transfer taxes, generally 0 percent to 2 percent, and the title fees, usually 1 percent of the purchase price.

How to Reduce Your Closing Costs

You can reduce your closing costs with a bit of planning and negotiation. While closing costs vary, in some cases, they are negotiable. Typically, you can save money on closing costs by paying for the property using all cash, asking the seller to pay a portion of your real estate closing costs, and negotiating the fees that the lender charges.

“As a buyer, if the home was on the market for a long period, we may ask the seller to contribute a certain dollar amount to closing costs. The buyer may shop their loan around to see if the lender may be willing to waive or reduce some loan costs. Some buyers also decide to place a down payment of 20 percent or more to have Private Mortgage Insurance waived.”
―Don Cramer, Real Estate Agent, Urban Nest Realty

Here are seven tips on how to potentially reduce your closing costs:

1. Real estate closing costs credit: Ask the seller to pay a portion of your closing costs as part of your negotiations. Remember to get this amount approved by your lender.
2. Compare lender costs: Shop around and compare lender fees, including application fees and loan origination fees.
3. Evaluate the loan estimate: Read the loan estimate line by line and check for inaccuracies or double charges.
4. Negotiate fees with the lender: Some of the lender’s closing costs are usually negotiable. You can negotiate them when applying for a loan.
5. Save on points: When interest rates are low, you typically won’t need to pay for points to lower your interest rate.
6. Pay cash to avoid lender fees: If you have enough saved to pay all cash for a property, you will eliminate all of the lender fees.
7. Reduce fees by being a repeat customer: If you use the same vendor, such as a title company, frequently, they may be more likely to reduce their fees due to your repeat business.

“The only fees we have been successful at reducing is the closing fee, the actual amount the title company charges to close the loan. We do enough volume with Heritage Title that we were able to negotiate those to a “builder” rate, which saves us a few hundred dollars on every transaction. In Colorado, the fees title companies can charge are regulated by the state, so every title company has roughly the same costs.”
―Nick Evans, Owner, Cinch Sell

Closing Costs Frequently Asked Questions (FAQs)

Below, we’re going to answer some FAQs about closing costs relating to real estate transactions.

How much are closing costs when purchasing a property with all cash?

When you purchase a property using all cash, you can typically negotiate a better price for the property, which translates to lower closing costs because closing costs are calculated based on the purchase price of the property. When you purchase a property with all cash, you also don’t have any lender fees. The amount of your closing costs will vary by location, property size, property tax amount, and more.

How much are closing costs when using owner financing?

Closing costs vary the most when you’re using owner financing, also known as seller financing, to finance a property. The closing costs will be up to the buyer and seller to negotiate and will typically be less than if the buyer is using a lender because no lender fees will be charged.

For more information on seller financing, check out our in-depth guide to seller financing.

Are real estate agent fees included in closing costs?

Real estate agent commissions and fees are usually factored into your closing costs and paid at settlement. In most states, real estate agent fees are 2 percent to 6 percent of the sales price of the house and are typically paid by the seller. However, this is negotiable, and some real estate agents also charge buyers fees.

How do you find out how much closing costs are?

Federal laws through the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA) require lenders to provide a loan estimate that reveals the closing costs on the property within three days of receipt of a loan application. In addition, at least three days prior to the closing date, the lender should provide a closing disclosure statement outlining all closing fees.

Bottom Line

Closing costs are expenses in addition to the purchase price of a property in a real estate transaction. Buyers and sellers both generally have closing costs, and they typically range from 2 percent to 5 percent of the purchase price of the property. Closing costs can include real estate agent fees, transfer taxes, lender fees, title fees, and more.