How much are closing costs for the buyer?

After diligently saving for a down payment, finding the perfect home, and getting a mortgage, closing costs can come as a surprise. After all, closing costs for buyers typically add up to 2% – 5% of the home's purchase price — adding thousands or even tens of thousands of dollars to an already steep price tag.    

Closing costs include expenses related to buying, financing, and owning the home. To buy and finance the property, you'll pay various one-time fees to your lender and third parties to process your loan application and ensure the house is a good investment (for you and the bank). And as a homeowner, you'll prepay some property-related costs, including property taxes, homeowners' insurance, and mortgage insurance. Knowing what closing costs cover — and what they cost — can help you budget and prepare for a smooth closing. 

One-time buyer closing costs

By law, lenders must give you a list of closing costs via a Loan Estimate within three days of receiving your mortgage application. The same closing costs will appear on your Closing Disclosure document unless exceptional circumstances apply — for example, you switch to a shorter loan term. Some closing costs vary by lender, so it pays to shop around and compare Loan Estimates before making any decisions.  

Here's a rundown of the typical one-time closing costs you'll encounter: 

Origination fee (or service fee)

Most lenders charge an origination fee to cover service and administrative costs. This is typically the largest fee you pay to close your mortgage. Most borrowers pay 0.5% – 1.5% of the loan amount, though it can be higher or lower depending on your lender, according to Credible.

Application fee

Some lenders charge an application fee of up to $500 in addition to the origination fee, according to Investopedia. The fee is non-refundable, even if you're rejected for the loan. As such, it's a good idea to avoid lenders that charge an application fee, especially if you're concerned about qualifying for the loan.

Underwriting fee

A mortgage underwriter evaluates and verifies loan applications and either approves or denies the loan based on their findings. The underwriting fee can be charged instead of — or in addition to — the origination fee, depending on the lender. If it's a separate fee, expect to pay between $300 and $900, says My Mortgage Insider.

Appraisal fee

Your lender will order a third-party appraisal to ensure you're paying a fair price for the house. The cost depends on several factors, including the property's location, size, and complexity, and the number of comparable properties (aka "comps") available. Most single-family home appraisals cost between $300 and $1,200, with a national average of $400, according to Fixr.

Discount points

Your lender might offer discount points. By paying points, you pay more upfront, but you receive a lower interest rate — so you'll spend less over time. Each point equals 1% of the loan amount and reduces your interest rate by one-eighth to one-quarter of a percent, according to the Consumer Financial Protection Bureau.

Prepaid interest

Prepaid interest covers the first month's mortgage interest. It's billed at a daily rate equal to your annual interest rate divided by 365. That amount multiplied by the number of days left in the month determines your prepaid interest.

Attorney fees

A real estate attorney coordinates the closing and prepares the closing documents, among other tasks. Attorney fees vary widely, and you could pay anywhere from $500 to $5,000, depending on the complexity of the transaction, according to Jones Property Law. Keep in mind that some states, such as North Carolina, require that an attorney oversees the closing process.

Title search and insurance

Your lender will hire a title company to perform a title search to ensure there are no outstanding legal claims or liens against the home. The title search runs about $200 to $400, according to Rocket Mortgage. However, if you have a closing attorney, they may roll the title search into their fee. 

You'll also pay for lender's title insurance, which protects the lender in case of any problems with the title. The lender’s title insurance policy is usually bundled with owner’s title insurance (which protects you) at a one-time cost that’s usually between 0.5% and 1.0% of the sale price, says Rocket Mortgage. 

Documentation fees

Real estate transfers involve a lot of paperwork that must be notarized, delivered, and recorded. These documentation fees generally add up to about $100 to $200, according to Zillow.

Credit report fees

Lenders pull credit reports from the three major credit bureaus to determine your creditworthiness, which helps the lender manage its risk. You pick up the tab for the credit reports, which usually runs about $25, according to Rocket Mortgage.

Other costs at closing

In addition to the one-time closing costs, you'll be on the hook for prepaids — upfront cash payments you make at closing to cover certain expenses before they're due. These fees go into an escrow account to ensure you have the money to pay your bills (and keep your lender happy). Typical prepaids include property taxes, homeowners' insurance premiums, and mortgage insurance.

Property taxes

Local governments collect property taxes to fund projects and services that benefit the community. As an ad valorem tax, the amount is based on your property's assessed value, which is multiplied by your local tax rate to calculate your tax bill. Property taxes are usually rolled into your monthly mortgage payment, with the current year's prorated amount due at closing.

Homeowners' insurance premiums

Homeowners insurance provides financial protection for your home and personal belongings. It also helps cover costs if you accidentally damage someone else's property or a visitor is hurt at your home. The cost depends on your insurance provider, the value of your home and belongings, and the coverage you select. Like property taxes, insurance premiums are usually included in your monthly mortgage payment, with six months to a year's worth prepaid at closing.

Mortgage insurance

Mortgage insurance protects the lender (not you) if you fall behind on your payments. If you get a conventional loan and put down less than 20%, you'll pay for private mortgage insurance (PMI). The rates vary by down payment and credit score, but it can cost 0.5% – 1% of your loan amount per year, according to Rocket Mortgage. 

If you get a Federal Housing Administration (FHA) loan and your down payment is less than 20%, you'll pay an upfront mortgage insurance premium (MIP) equal to 1.75% of the loan. After that, you'll pay annual MIPs that vary based on the loan's size, term, and the loan-to-value ratio.

What about "no-closing-cost" mortgages?

Despite the name, a no-closing-cost mortgage doesn't mean you get away without paying any closing costs. Instead, your lender either rolls the closing costs into your monthly mortgage payment or charges you a higher interest rate for the life of the loan. Either way, you pay less at the closing table, but the true cost of your home substantially increases. Therefore, it doesn't usually make financial sense to go with a no-closing-cost mortgage. 

Still, a no-closing-cost mortgage can be advantageous for first-time homebuyers who may have trouble coming up with a down payment, let alone closing costs. It can also be a good option if you expect to move or refinance in a year or two before those higher monthly payments or interest rates would add up.

Can you have the seller cover closing costs?

Closing costs add up to a big chunk of change, but seller concessions can make these expenses more manageable. A seller concession is an arrangement where the seller agrees to pay some of the closing costs using proceeds from the sale. Of course, you still end up paying these costs indirectly: if you and the seller negotiate a concession, the amount will generally be added to the home's sale price — and your mortgage.

Sellers are more likely to agree to concessions in a buyer's market — when there are plenty of homes for sale but a shortage of interested buyers. Home prices in a buyer's market generally drop, and houses take longer to sell. In these situations, a seller might offer to pay some closing costs to make their home more attractive to potential buyers.

Related: How much are closing costs for the seller?

Can higher closing costs be a good thing?

Higher closing costs can be good if they ultimately save you money over the long run. This happens with mortgage discount points, which increase your upfront closing costs while buying down your interest rate. One point equals 1% of the loan amount, with each point typically shaving one-quarter of a percent off the interest rate. For example, on a $400,000 loan, you would save about $22,000 per point over the life of the loan, assuming an initial 5% interest rate.  

Points generally make sense if you plan on staying in the home long enough to recoup the higher upfront costs. You can use an online mortgage points calculator to crunch the numbers and help you decide.

Wrapping up

When you buy a home, you have to budget for the down payment and the closing costs, which can be substantial. You can use funds from your personal checking or savings account to pay closing costs, or your lender can roll the costs into your loan.

Buyers typically have a higher number of closing costs than sellers, though not necessarily the higher cost. That's because sellers usually pay the real estate commission, which gets divvied up between the seller's listing agent and the buyer's agent. Real estate agent commissions are generally the largest charge included in closing costs since agents traditionally  make 6% of the home's total price. When buying with Opendoor, customers can get a 1% refund to offset this cost and ultimately pay less.