Why closing costs exist
A home purchase involves more than the seller and the buyer. A lender, an appraiser, an inspector, a title company and a local recording office all do work, and each one charges. Some of those charges are paid up front, some at the closing table, and some are folded into the loan.
As a rough planning idea, closing costs commonly run a few percent of the purchase price. On a $300,000 home, each percentage point is $3,000, so a few points is a meaningful sum. Treat that as a reason to get your own estimate early, not as a figure to rely on.
The usual categories
Lender charges are fees for processing and underwriting the loan, and sometimes points, which are paid to lower the rate. An appraisal estimates the value of the home for the lender. A home inspection is usually ordered by the buyer for their own protection and is often paid before closing.
Title charges cover searching the property's ownership records, title insurance and the settlement work. Recording fees are paid to the local government to register the deed and mortgage. Prepaids include the first year of homeowners insurance and some property taxes and interest, collected in advance. Finally, escrow, sometimes called a reserve, is a cushion the lender may require so that future tax and insurance bills can be paid for you.
Who pays what depends on where and how
Amounts and customs vary by state, by lender and by the terms of your contract. In some places the buyer and seller commonly split certain title or transfer charges, and in others one side usually pays. A seller may agree to cover part of the buyer's costs as part of a negotiated deal, and some loan programs limit that. Your purchase contract is where this is spelled out, so read it before you rely on any rule of thumb.
Ask your agent and your lender which charges are typical in your area, and ask which ones you can shop for. Title services and some inspections can sometimes be compared across providers.
Compare two documents before closing day
Within a few days of applying for a mortgage, lenders must provide a standardized Loan Estimate that lists your projected costs. Before closing you receive a Closing Disclosure with the final numbers. Put them side by side and ask about any line that grew or appeared. The Consumer Financial Protection Bureau explains both forms on its owning-a-home pages, including which charges are allowed to change.
Use the mortgage payment calculator to see how rolling a cost into the loan, or paying extra points, changes the monthly payment, not just the cash you need on the day.
A planning checklist
Ask for a Loan Estimate early. Add the down payment, closing costs, moving costs and a reserve for repairs, then confirm the total fits your savings with money left over. Ask who is arranging the signing and what documents or identification you need to bring. Many closings include a notary, who verifies identity and witnesses signatures, so ask the title company or lender how that is handled and whether any fee applies.
Finally, confirm how you will send funds. Wire instructions are a common target for fraud, so call a number you already trust to verify them before sending money.
Try the calculator
Run your own numbers in the free mortgage payment calculator. It works in your browser and nothing you enter is saved or sent.
Sources
Common questions
Can I roll closing costs into the loan?
Sometimes, depending on the loan and the lender. Doing so raises the balance and the interest you pay, so compare the total cost, not only the cash saved.
Why did my Closing Disclosure change?
Some charges can change and some cannot by much. Ask your lender to explain each difference line by line.
Are closing costs tax deductible?
Some items may be treated differently for taxes. Ask a tax professional about your own situation.
This guide is general information, not financial, tax or legal advice. Rates, fees and rules change, so confirm current terms with the lender, store or agency involved. All dollar figures are invented examples.