Buying your first home can be exciting, but it often comes with surprises. One of the biggest surprises for many first-time buyers is closing costs.

These are fees beyond the down payment that you’ll need to pay when finalizing your home purchase.

Closing costs typically range from 2% to 5% of your loan amount, which means you’ll need to budget thousands of dollars beyond your down payment to complete your home purchase.

For example, on a $300,000 home, closing costs might add $6,000 to $15,000 to your upfront expenses.

Understanding these costs early in the home buying process helps you prepare financially and avoid last-minute stress. This guide breaks down what closing costs include, when they’re due, and how you might be able to reduce them.

Understanding Closing Costs

Buying a home involves more than just the purchase price. Closing costs are additional expenses that must be paid before you can officially take ownership of your property.

These fees typically range from 2-5% of the loan amount.

What Are Closing Costs?

Closing costs are fees and expenses you pay when finalizing a mortgage and transferring property ownership. They are paid at the “closing” of your real estate transaction, which is the final step in the home buying process.

These costs cover services and expenses required to successfully transfer ownership from the seller to you. Unlike your down payment, closing costs don’t contribute to your home equity.

Most closing costs are paid by the buyer, though sometimes sellers may agree to cover some expenses. This is often negotiated as part of the purchase offer.

Your lender must provide you with a Loan Estimate within three business days of receiving your mortgage application. This document outlines your expected closing costs.

Common Fees and Charges

Closing costs include various fees that fall into several categories:

Lender Fees:

• Loan origination fee (0.5-1% of loan amount)
• Application fee ($300-500)
• Credit report fee ($25-50)
• Underwriting fee ($300-900)

Third-Party Fees:

• Appraisal fee ($300-500)
• Home inspection ($300-500)
• Title search and insurance ($500-1,000)
• Attorney fees (varies by location)

Government Fees:

• Recording fees ($25-250)
• Transfer taxes (varies by location)
• Property taxes (prorated amount)

Prepaid costs are also included, such as homeowners insurance premiums, property tax deposits, and mortgage interest that will accrue between closing and first payment.

How Are Closing Costs Calculated?

Closing costs are calculated based on your loan amount, property location, and the specific services needed for your transaction. Location significantly impacts these costs, as states and municipalities have different tax rates and required fees.

Your lender will provide a Loan Estimate that breaks down expected closing costs. This estimate comes within three days after you apply for a mortgage.

About three days before closing, you’ll receive a Closing Disclosure with the final figures. Compare this carefully with your Loan Estimate to identify any unexpected increases.

Many closing costs are negotiable. You can shop around for services like title insurance and home inspections to find better rates.

Some lenders offer credits or “no closing cost” mortgages, though these typically include higher interest rates.

Remember to budget for closing costs in addition to your down payment when planning your home purchase. Most financial advisors recommend setting aside 3-5% of your loan amount for these expenses.

Preparing for Closing Costs

Being prepared for closing costs helps prevent financial surprises when buying your first home. Understanding how to estimate, save for, and possibly reduce these expenses is an essential part of the home buying process.

Estimating Your Costs

Most homebuyers can expect to pay between 2% and 5% of their loan amount in closing costs. For a $300,000 home, that means preparing for $6,000 to $15,000 in additional expenses.

To get a more accurate estimate, buyers should:

• Request a Loan Estimate from multiple lenders
• Ask for a closing cost worksheet that breaks down individual fees
• Use online closing cost calculators to get ballpark figures

The Loan Estimate document, which lenders must provide within three business days of your application, offers the most reliable preview of what you’ll pay at closing.

Remember that closing costs vary by location due to differences in taxes, insurance, and local fees. States like New York and Texas typically have higher closing costs than others.

Saving for Closing Costs

Start saving for closing costs as early as possible, ideally months before beginning the home search. Creating a dedicated savings account keeps these funds separate from other savings.

Some effective saving strategies include:

• Setting up automatic transfers to your closing cost fund
• Temporarily reducing discretionary spending
• Putting tax refunds or work bonuses toward your closing costs
• Taking on side gigs for additional income

Financial experts recommend saving slightly more than your estimated costs to cover unexpected fees. Having a buffer of 10-15% above your estimate provides peace of mind.

Many lenders look favorably on borrowers who can demonstrate they’ve saved specifically for closing costs rather than depleting emergency funds.

Negotiating with Sellers

Buyers can sometimes reduce their closing costs through negotiation. In buyer’s markets, sellers may be more willing to contribute to closing costs to complete the sale.

Common negotiation approaches include:

• Asking the seller to pay a percentage of closing costs (typically 3-6%)
• Requesting specific closing cost credits instead of a lower purchase price
• Trading other concessions for closing cost assistance

These negotiations should be included in the initial offer or subsequent counteroffers. The buyer’s agent can advise on what’s reasonable to request based on local market conditions.

Keep in mind that lenders set limits on seller concessions. Conventional loans typically cap seller contributions at 3-9% depending on the down payment amount.

Finalizing the Purchase

The final steps of buying a home involve careful review of documents and attending the closing meeting. These steps ensure everything is accurate before you officially become a homeowner.

Reviewing the Closing Disclosure

Your lender must send you a Closing Disclosure at least three business days before closing. This five-page document shows your loan terms, monthly payments, and closing costs.

Compare it carefully to your Loan Estimate to check for any unexpected changes. Pay special attention to:

• Loan amount and interest rate
• Monthly payment figures
• Closing costs and who pays what
• Any prepayment penalties or balloon payments

If you spot errors or have questions, contact your lender immediately. These three days give you time to resolve issues before closing day.

What to Expect on Closing Day

On closing day, bring your photo ID, a copy of your Closing Disclosure, and proof of funds for any remaining costs.

The meeting typically takes 1-2 hours.

You’ll sign many documents, including:

• The mortgage note
• The deed of trust or mortgage
• Various disclosures and agreements

A closing agent will guide you through each document. Don’t hesitate to ask questions if something isn’t clear.

Once everything is signed, you’ll receive the keys to your new home.

The closing agent will record the deed transfer with the local government, officially making you the property owner.