Home Buying Guide
Beyond the Down Payment: A Guide to Understanding Closing Costs
You have found the home, your offer was accepted, and you have mentally moved your furniture into the living room. But before you get the keys, there is one final hurdle: closing costs.
What Are Closing Costs?
Many buyers focus entirely on their down payment, only to be surprised by an additional bill at the very end. Closing costs are the fees and expenses paid to finalize your home purchase, covering everything from the person who searched the home's history to the government agency that records your new deed.
Think of it this way: the purchase price buys the house, but closing costs pay the people and institutions that make the transfer legally binding. Without them, there would be no official record that you own the property, no insurance protecting your title, and no guarantee the home is worth what you paid.
The good news? Your lender is legally required to give you a detailed breakdown of every expected cost early in the process. You will not be blindsided if you know what to look for.
The 2–5% Rule of Thumb
For most buyers, closing costs total between 2% and 5% of the home's purchase price. On a $400,000 home, that means you should budget between $8,000 and $20,000 in addition to your down payment.
On a $400,000 Home
The exact percentage depends on your location, loan type, and lender. FHA loans tend toward the higher end due to the upfront mortgage insurance premium, while no-closing-cost loans shift fees into your interest rate.
Where does this money go? It is split among several parties: your lender (for processing the loan), a title company (for ensuring clean ownership), an appraiser (for verifying property value), your local government (for recording the deed), and your insurance company (for prepaid coverage). The next section breaks down each one.
“The purchase price buys the house. Closing costs pay everyone who makes the transfer legally binding.”
The “Big Six” Fees You Will Encounter
While every deal is different, most buyers will see these six items on their final Closing Disclosure.
Loan Origination Fees
0.5–1% of loanWhat the lender charges to process and underwrite your application. This is often the single largest line item on your Closing Disclosure.
Appraisal Fee
$300–$600A professional assessment to ensure the home is actually worth the price you agreed to pay. The lender requires this to protect their investment.
Title Insurance
$500–$3,500Protects you and the lender against any historical disputes over who owns the land. Two policies are typically issued: one for you and one for the lender.
Attorney Fees
$500–$1,500Expert legal review to ensure your contracts are airtight. Required in some states, optional but recommended in others.
Prepaid Items
VariesMoney deposited into an escrow account for your future property taxes and homeowners insurance. Typically 2–6 months of taxes and 12 months of insurance.
Recording Fees
$50–$250Small government charges to officially register you as the new owner. Your county clerk records the deed and mortgage documents.
Can You Reduce These Costs?
You do not always have to foot the entire bill yourself. Here are three proven strategies to lower your out-of-pocket expenses at closing.
Negotiate Seller Concessions
In many markets, you can ask the seller to cover a portion of your closing costs (often 2–6%) as part of your purchase agreement. This is especially common in buyer-friendly markets or when the home has been sitting for a while.
Shop Multiple Lenders
Origination fees vary wildly between lenders. Comparing Loan Estimates from at least three banks can save you thousands. The Consumer Financial Protection Bureau recommends shopping within a 14-day window to minimize credit score impact.
Ask About Lender Credits
Some banks will pay your closing costs in exchange for a slightly higher interest rate. This is a smart move if you plan to refinance or sell within a few years, since the higher rate has less time to compound.
“Comparing Loan Estimates from three different lenders can save you thousands. It is the single best hour you will spend in the entire process.”
Loan Estimate vs. Closing Disclosure
Two critical documents bookend your closing cost journey. Understanding the difference between them is essential.
Loan Estimate
- Provided within 3 business days of application
- Preliminary breakdown of expected costs
- Includes estimated interest rate and monthly payment
- Allows you to comparison-shop between lenders
- Not a commitment — numbers may change
Closing Disclosure
- Provided at least 3 business days before closing
- Final, legally binding version of all costs
- Shows exact interest rate, monthly payment, and cash due
- Must be compared line-by-line with your Loan Estimate
- Any major changes may delay closing by 3 days
Pro tip: When comparing the two documents, pay special attention to Section A (origination charges), Section B (services you cannot shop for), and Section C (services you can shop for). Lender fees in Section A should not change at all. Third-party fees in Sections B and C have a 10% tolerance – anything above that, your lender must absorb the difference.
The Final 72 Hours
Here is what to expect in the three days before closing day.
Step 1
Receive Your Closing Disclosure
Three days before you sign, you will receive your Closing Disclosure. This is the final, legally binding version of your costs. Read every line.
Step 2
Compare Line by Line
Hold your Loan Estimate next to your Closing Disclosure. If you see a major change — especially in lender fees or third-party charges — ask why before you sign.
Step 3
Final Walkthrough
Walk the home 24–48 hours before closing. Confirm that agreed-upon repairs are done, appliances work, and the home is in the condition you expected. Bring your ID and a cashier’s check.
Step 4
Sign and Get the Keys
The closing meeting typically takes 1–2 hours. You will sign the mortgage note, deed of trust, and a stack of other documents. Once everything is recorded, the home is officially yours.
“Read every line of your Closing Disclosure. If a number changed and nobody told you why, do not sign until you get an answer.”
State-Specific Costs to Watch For
Closing costs are not uniform across the country. Several fees vary dramatically depending on where you are buying.
Transfer Taxes
Some states and municipalities charge a transfer tax when property changes hands. This can range from a fraction of a percent to over 2% in high-cost areas. In some states the buyer pays, in others the seller pays, and in some it is split.
Attorney Requirements
About half of U.S. states require an attorney to be present at closing. In “attorney states” like New York, Massachusetts, and Connecticut, expect to budget $1,000–$2,500 for legal fees. In “title states,” a title company handles the closing at a lower cost.
Mortgage Recording Tax
A few states (most notably New York) charge a separate tax just for recording the mortgage document. On a $300,000 loan in New York City, this alone can exceed $5,000. Check your state's requirements early so there are no surprises.
Bottom line: Always ask your real estate agent or attorney about location-specific fees before you finalize your budget. What costs $500 in one state could cost $5,000 in another.
Continue Your Buying Journey
- First-Time Home Buyer Guide — From pre-approval to closing day, every step explained
- Mortgage Calculator — Estimate your monthly payment with taxes and insurance
- Building Wealth Through Real Estate — Cap rates, cash-on-cash returns, and the BRRRR method
Frequently Asked Questions
How much are closing costs on a $400,000 home?
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On a $400,000 home, closing costs typically range from $8,000 to $20,000 (2–5% of the purchase price). The exact amount depends on your location, lender, loan type, and whether you negotiate seller concessions.
Can closing costs be rolled into the mortgage?
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Some loan programs allow you to finance closing costs by adding them to your mortgage balance. This reduces your upfront cash outlay but increases your monthly payment and total interest paid over the life of the loan. Ask your lender about "no-closing-cost" mortgage options.
What is the difference between a Loan Estimate and a Closing Disclosure?
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A Loan Estimate is provided within three business days of your mortgage application and gives you a preliminary breakdown of expected costs. The Closing Disclosure is the final, legally binding version delivered at least three business days before closing. The two documents should be compared line by line to catch any unexpected changes.
Are closing costs tax deductible?
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Some closing costs are tax deductible, including prepaid property taxes, mortgage interest points, and certain loan origination fees. Title insurance, appraisal fees, and recording fees are generally not deductible. Consult a tax professional for advice specific to your situation.
Who pays closing costs — the buyer or the seller?
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Both buyers and sellers have closing costs, but they pay for different items. Buyers typically pay for loan-related fees, title insurance (lender policy), prepaid items, and recording fees. Sellers usually pay the real estate agent commissions and transfer taxes. In many markets, buyers can negotiate for the seller to cover a portion of buyer closing costs.