You've saved for the down payment, gotten pre-approved, and had your offer accepted. Then your lender sends you a document with a long list of fees totaling thousands of dollars—money due at closing on top of your down payment. For many buyers, closing costs come as an unwelcome surprise, adding 2% to 5% of the loan amount to their upfront expenses.
On a $300,000 loan, closing costs typically range from $6,000 to $15,000. That's a significant chunk of money, and understanding what you're paying for—and what's negotiable—can help you budget accurately and potentially save thousands.
What Are Closing Costs?
Closing costs are the fees charged by various parties involved in your home purchase transaction. Unlike your down payment, which goes toward buying the home itself, closing costs pay for the services required to complete the sale: processing your loan, verifying the property's value and condition, ensuring clear title, and funding your escrow accounts.
These costs are itemized on your Closing Disclosure, a document your lender must provide at least three business days before closing. You'll also receive a Loan Estimate within three business days of applying, giving you an early look at expected costs. Comparing these documents helps you catch any surprise increases and holds lenders accountable to their quotes.
Closing costs fall into three broad categories: fees paid to your lender, fees paid to third parties for services, and prepaid items that fund your escrow accounts.
Lender Fees
Your lender charges fees for originating and processing your loan. The biggest is typically the origination fee—usually 0.5% to 1% of the loan amount—which compensates the lender for evaluating and preparing your mortgage. On a $300,000 loan, that's $1,500 to $3,000 just for this one line item.
The underwriting fee covers the cost of reviewing your application, verifying your documentation, and assessing risk. This typically runs $400 to $900. You may also see a separate application fee ($75-$500) and credit report fee ($25-$50), though some lenders bundle these into their other charges.
If you're buying discount points to lower your interest rate, that cost appears here too. Each point costs 1% of your loan amount and typically reduces your rate by about 0.25%. Whether points make sense depends on how long you'll keep the loan—they're essentially prepaying interest for a lower rate later.
These lender fees are where you have the most room to shop. Different lenders charge different amounts, and getting Loan Estimates from multiple lenders lets you compare not just interest rates but total lending costs. A loan with a slightly higher rate but lower fees might cost less overall, especially if you plan to sell or refinance within a few years.
Third-Party Fees
Various third parties provide services essential to completing your purchase, and their fees appear on your closing statement whether or not you chose them directly.
The appraisal ($300-$600) protects your lender by confirming the home is worth at least what you're paying. The appraiser—a licensed professional chosen by the lender—inspects the property and compares it to recent sales of similar homes. You pay for this service, but you don't choose the appraiser.
The home inspection ($300-$500) protects you by identifying problems with the property. Unlike the appraisal, you choose and hire your own inspector. While technically optional, skipping a home inspection is rarely wise—the few hundred dollars spent here can reveal issues that would cost tens of thousands to fix.
Title services represent a significant portion of closing costs. The title search ($200-$400) examines public records to verify the seller has clear ownership and the right to sell. Title insurance protects against future claims against your ownership—the lender requires coverage for their interest, and you can purchase an owner's policy to protect yours. Combined, title costs often run 0.5% to 1% of the purchase price.
Depending on your location and property type, you might also see fees for a survey ($150-$400) to verify property boundaries, pest inspection ($50-$150), or attorney fees in states where lawyers handle closings. Your area's customs determine which of these are standard.
Prepaid Items and Escrow
Part of what you pay at closing isn't really a "cost"—it's money set aside to fund your escrow account for property taxes and insurance. Your lender collects this upfront so they can pay these bills on your behalf, ensuring the property stays insured and tax-current.
You'll typically prepay 2 to 6 months of property taxes, depending on when taxes are due in your area and when you close. This creates a cushion in your escrow account. Similarly, you'll pay your first year's homeowner's insurance premium upfront (though this is sometimes paid separately before closing).
Prepaid interest covers the period between your closing date and your first mortgage payment. Since mortgage payments are made in arrears (your first payment is due 30-45 days after closing), you prepay the daily interest for those interim days. Closing at the end of the month minimizes this amount.
While prepaid items add to your closing costs, they're not profit for anyone—this money goes into accounts you own and benefit from. The timing just means you need more cash at closing.
Strategies to Reduce Closing Costs
Shop lender fees aggressively. Origination fees, underwriting fees, and other lender charges vary significantly. Getting quotes from three to five lenders gives you leverage to negotiate and ensures you're not overpaying. Some lenders advertise "no closing costs" loans, but read carefully—they're typically rolling costs into your interest rate or loan balance.
Negotiate seller contributions. In many markets, it's common to ask sellers to pay some or all of your closing costs. This is especially viable in buyer's markets or when you have leverage. The seller credits you at closing, which reduces the cash you need. Note that loan programs limit how much sellers can contribute—typically 3% to 6% of the purchase price.
Ask about lender credits. Some lenders offer credits toward closing costs in exchange for a slightly higher interest rate. If you plan to sell or refinance within a few years, accepting a higher rate to reduce upfront costs can make financial sense.
Close at the end of the month. Since prepaid interest covers days between closing and your first payment, closing on the 28th means fewer days to prepay than closing on the 5th. This alone can save several hundred dollars.
Shop for third-party services where allowed. Your lender must let you shop for certain services marked on your Loan Estimate. You might find a less expensive title company, surveyor, or other provider than the one your lender suggests.
Request a Closing Disclosure early and compare it to your original Loan Estimate. Certain fees can't increase, others can only increase by 10%, and some are unlimited. If you see unexpected increases, ask questions before closing day arrives.