What Are Closing Costs in Real Estate Transactions?

If you’re thinking about buying a home, it’s important to account for closing costs. These are the upfront costs associated with transferring property from one person to another.

Closing costs are an additional expense beyond the down payment. But like the down payment, you usually pay them on or before closing day.

Make sure you know what fees you need to pay for so you won’t be blindsided by how much is due at closing. Learn more about what closing costs are, who pays them, how to calculate them, and ways to reduce them.

What exactly are closing costs?

Closing costs, or settlement costs, are an extra expense beyond the property’s purchase price. The buyer — and sometimes seller — must pay them when transferring ownership of real estate property, usually at closing time. Closing costs don’t include the down payment, but they may include home appraisal, title insurance fees, and other items.

“Closing costs are one of the main financial impacts of the homebuying process,” says Ashley DeHart, a REALTOR® at Realty from DeHart. “They include: title/escrow fees, loan fees, any seller credits, appraisal fees, title insurance, REALTOR® commissions, taxes, insurance and filing fees. Many of these costs are flat fees that aren't negotiable.”

If you’re getting a mortgage, your lender must provide you with a closing disclosure at least three business days before the scheduled closing date. This document should list all closing fees. It should also include any relevant details about your mortgage, such as the interest rate, monthly payment costs, and cash needed to close (including the down payment).

Common types of closing costs explained

There are separate closing costs for buyers and sellers. Your location, state law, lender requirements, and the terms of the agreement will determine which ones you’re responsible for.

“Typically the closing costs are paid by those who create the cost, known as 'each to pay their own,'” DeHart says. “However, as with all parts of the transaction, who is responsible for paying what is negotiable and decided within the offer/counteroffer process.”

With that in mind, these are the main types of closing costs and who typically pays them:

• Appraisal fee: A home appraisal determines the property’s value compared to similar properties in the area. The buyer typically pays this at closing.
• Application fee: Some mortgage lenders charge an application fee when you apply for a loan. This may be included with the total closing costs and is typically paid by the buyer.
• Attorney fees: Certain states require a real estate lawyer to be present at closing. The buyer usually pays attorney fees.
• Credit report fee: Lenders typically pull your credit report to determine whether to approve your loan, its terms, amount, and interest rate. Buyers can expect to pay about $30 per credit report.
• Discount points: Mortgage discount points can let you buy down your interest rate by paying extra at closing. Discount points are optional, and usually paid by the buyer.
• Origination fees: Home loans come with an origination fee, which is the cost of processing and underwriting the loan. This is a closing cost for buyers.
• Prepaid interest or escrow fees: The buyer typically needs to pay certain costs in advance, including homeowners insurance or mortgage insurance premiums, property taxes, and homeowners association (HOA) fees. The buyer may also need to prepay any interest that incurs between closing date and the first loan payment.
• Property survey fee: Depending on where the property is located, the buyer may need to get a survey of the property before finalizing the transaction.
• Recording fee: This may be required to update any changes to ownership of the property. It’s included in the buyer’s closing disclosure.
• Taxes: The buyer may need to pay government or transfer taxes to finalize the home purchase process.
• Title insurance policy fee:  Lenders often require homebuyers to have title insurance. Title insurance protects you as the buyer against potential claims against the property prior to purchase.
• Title search fee: A title search can tell you who legally owned the property before you and whether there are any current claims or liens against it.

Ultimately, closing costs primarily fall on the buyer, though the seller may pay some costs as well.

“Closing costs usually affect the buyer more because they're the ones paying most of the fees. However, sellers could feel the impact, too — especially if they agree to pay some of the costs as part of the deal,” says Michael Branson, CEO of All Reverse Mortgage, Inc.

According to Branson, it depends on whether it’s a buyer’s or seller’s market.

“In competitive markets, sellers might offer to pay a portion to attract buyers, but in a seller’s market, buyers usually shoulder most of the cost,” he says. “So it could all really come down to the specific deal and market conditions.”

How are closing costs calculated?

As you go about the homebuying process, it’s important to understand how closing costs are calculated. Some closing costs (such as the credit report fee) will be a set amount regardless of your loan or property size. Other costs (such as taxes, escrow fees, or discount points) will depend on your property and loan. You can typically estimate closing costs to be about 2% to 5% of the home’s sale price.

“The final number can still go higher or lower, based on several things like the home location, loan type, lender's policies, possible negotiations, and more,” Branson says.

When you apply for a loan, you should receive a loan estimate detailing the possible closing costs. You can use this as a baseline to determine how much your total upfront costs are going to be.

Before formally agreeing to a loan, compare the loan estimate with the closing disclosure. The closing disclosure will provide more accurate details of the loan, including the total amount needed for closing.

Tips for reducing closing costs

According to the Consumer Financial Protection Bureau (CFPB), closing costs rose by 36% from 2021 to 2023. While some closing costs are unavoidable, here are some ways to lower your total upfront expenses:

• Shop around for lower-priced services: Compare different service providers, like the title insurance company and home inspection company, to find the best price. According to Branson, you could save a few hundred dollars this way.
• Negotiate for lower fees: Lender fees can add up, so see if you can negotiate some of these down.
• Use lender credits: Lender credits can lower closing costs in exchange for a higher interest rate. 
• Consider a no-closing-cost loan: Certain lenders offer loans without upfront closing costs that let you fold costs into overall loan amount. While this reduces your cash at closing, you’ll have a higher loan amount overall.
• Look into assistance programs: Some borrowers, especially first-time homebuyers or low- to moderate-income households, qualify for down payment and closing cost assistance programs. This can reduce the upfront costs and make it easier to afford a home. Depending on the program, you may need to repay any assistance received.

“Another thing you can do is to ask the seller to cover part of the closing costs,” Branson says. “This is what we call a seller concession — and while it usually depends on the market and how motivated the seller is to close the deal, doing this can greatly reduce your upfront expenses.”

Closing costs: What buyers and sellers need to know

Closing costs are the fees involved in finalizing a real estate transaction. They include appraisal fees, title search fees, government taxes, and loan servicing fees. They’re usually paid by the buyer, but the seller may contribute as well.

The closing cost amount depends on factors like location and property value. Typically, they’re 2% to 5% of the home purchase price. For a $400,000 home, expect to pay anywhere from $8,000 to $20,000 in closing costs.

When getting a mortgage, be sure to review the loan estimate alongside the closing disclosure for any major discrepancies. Before closing, you may be able to reduce closing costs by negotiating with your lender, shopping around for cheaper service providers, or choosing a no-closing-cost loan.