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You’ve found the house.
You’ve figured out your down payment.
You’ve gotten pre-approved.
Then someone mentions closing costs.
And suddenly you’re wondering:
“Wait…what else do I have to pay for?” 😅
Closing costs are one of those parts of buying a home that can catch buyers off guard if they haven’t planned for them.
The good news is that understanding them ahead of time can make the home-buying process feel a lot less overwhelming.
So, how much are closing costs when buying a home?
Let’s break it down.
What Are Closing Costs?
Closing costs are the various expenses associated with getting your mortgage and completing your home purchase.
They are separate from your down payment.
According to the Consumer Financial Protection Bureau, closing costs can include expenses such as lender charges, appraisal fees, title services, government taxes and recording fees, prepaid interest, homeowners insurance and initial escrow deposits. Your actual costs will depend on your loan, property and transaction.
A commonly used planning range is about 2% to 5% of the purchase price, but this is only a general estimate. Your actual closing costs could be higher or lower.
For example, if you’re purchasing a $300,000 home, 2% to 5% would be approximately:
2% = $6,000
3% = $9,000
4% = $12,000
5% = $15,000
That’s a planning range, not a quote.
Your actual closing costs will depend on your individual loan and transaction.
What Do Closing Costs Include?
Closing costs aren’t just one single fee.
They can include several different expenses connected to your mortgage and purchase.
Some common costs may include lender or origination charges, appraisal fees, title services, title insurance, government recording charges, prepaid interest, homeowners insurance and initial escrow deposits for property taxes and insurance.
Depending on your loan and transaction, there may also be other costs.
That’s why it’s important to look at the actual numbers for your specific purchase rather than simply assuming you’ll pay a certain percentage.
Closing Costs Are Not the Same as Your Down Payment
This is an important distinction for buyers.
Your down payment is the amount you’re putting toward the purchase price of the home.
Your closing costs are the other expenses associated with getting the loan and completing the transaction.
For example, let’s say you’re purchasing a $300,000 home and putting 5% down.
Your down payment would be:
$15,000
If your estimated closing costs were 3%:
$9,000
That doesn’t necessarily mean you will need exactly $24,000 in cash at closing.
There may be earnest money you’ve already paid, seller credits, lender credits or other adjustments that affect the amount you’ll actually need to bring to closing. The CFPB’s Loan Estimate Explainer shows how these credits and deposits can affect your estimated cash to close.
Your lender will provide estimates based on your specific loan.
What Is a Loan Estimate?
If you’re getting a mortgage, one of the most important documents you’ll receive early in the process is your Loan Estimate.
A Loan Estimate provides important information about your loan, including your estimated interest rate, monthly payment and closing costs.
It’s designed to help you understand the costs of your mortgage and compare loan offers.
When reviewing your Loan Estimate, don’t just look at the bottom-line number.
Review the individual costs and ask questions about anything you don’t understand.
The CFPB also provides a Loan Estimate Explainer that walks through the different sections of the form.
Can Your Closing Costs Be Covered?
Here’s something buyers don’t always realize:
You may not always have to pay all of your closing costs out of your own savings.
Depending on your loan program and the details of the transaction, there may be ways to reduce the amount you need to pay out of pocket.
For example, some buyers may qualify for down payment or closing-cost assistance programs. Certain loan programs may also allow eligible costs to be covered through approved sources of funds.
Another possibility is seller credits.
As part of your offer negotiations, you may be able to ask the seller to contribute toward certain closing costs.
Whether a seller agrees can depend on the market, the terms of your offer and the seller’s situation. The CFPB explains that seller credits can be used to offset certain closing costs, but the details depend on the transaction and applicable rules.
There are also limits on how much a seller can contribute, and those limits can vary depending on the type of mortgage you’re using.
That’s why it’s important to talk with your lender before assuming you’ll need to bring the entire amount of your estimated closing costs to the closing table.
What About Lender Credits?
You may also hear about lender credits.
A lender credit can help reduce the amount you pay upfront toward closing costs.
But there can be a trade-off.
Lender credits generally reduce your closing costs upfront in exchange for a higher interest rate.
That doesn’t automatically mean lender credits are good or bad.
It means you should understand the numbers and compare your options before deciding.
The CFPB recommends comparing loan options with and without points or credits so you can see how they affect your cash needed at closing, monthly payment and overall borrowing costs.
Sometimes reducing your upfront costs makes sense.
Sometimes another option may be better.
The right choice depends on your situation.
Does That Mean You Don’t Need Money Saved?
Not necessarily.
Even if you’re able to use assistance, seller credits or other options to reduce your closing costs, you should still understand exactly what expenses you’ll be responsible for.
Your lender can help you determine your estimated cash to close, which is the amount you’ll actually need to bring to closing after accounting for things such as your down payment, closing costs, deposits and applicable credits.
The goal isn’t to assume someone else will pay your closing costs.
The goal is to know your options before you get there.
How Can Buyers Prepare for Closing Costs?
The best way to avoid surprises is to start asking questions early.
Before you begin seriously shopping for a home, talk with your lender about what your estimated closing costs could look like based on your price range and loan program.
As you move through the mortgage process, review the estimates your lender provides and ask questions about anything you don’t understand.
You can also ask about available down payment assistance, closing-cost assistance, seller credits and lender credits and how those options could affect your overall costs.
The more you understand before making an offer, the better prepared you’ll be to make informed decisions.
The Bottom Line
Closing costs are an important part of buying a home, but they don’t have to be a surprise.
Understand what they are, know what they may include, and most importantly, ask about your options.
Depending on your situation, there may be ways to reduce the amount you have to pay out of pocket through eligible assistance programs, seller credits or other financing options.
Before you start house hunting, make sure you understand your down payment, your estimated closing costs and your potential cash to close.
Because knowing your numbers before you make an offer can make the road to the closing table a whole lot less stressful. 🏡
Make Moves with Faith
Faith Morris | ERA Wilder Realty
Serving Lexington & the Midlands of South Carolina
Thinking about buying a home and not sure where to start?
Let’s talk about your next move.
Closing costs, loan requirements, fees and available credits can vary based on the property, loan program, lender and individual transaction. This article is for educational purposes only and is not a guarantee of loan approval or specific costs. Buyers should consult with their lender for an estimate based on their individual situation.
