Mortgage Closing Costs Explained: What They Are and How Much They Cost

Most people know that they will need to pay a down payment when they buy a house. But it is important to not forget about closing costs. Learning how to financially plan for them before you buy can prevent sticker shock later on.

Closing costs are the fees you pay to finalize your mortgage and transfer ownership of your new home. They typically run 2 to 5 percent of your loan amount. On a $405,000 loan (a $450,000 home with 10 percent down), that works out to roughly $8,100 to $20,250, depending on where you buy and the loan you choose.

Below, we’ll walk through what’s included, when each cost comes due, who pays what, and practical ways to bring your costs down.

What Are Closing Costs?

Closing costs cover everything it takes to approve your loan, verify the property, and legally record the sale. They fall into four groups:

• Lender fees: charges for originating and underwriting your loan
• Third-party fees: appraisal, title, settlement, and other services
• Government taxes and fees: transfer taxes, recordation taxes, and recording fees
• Prepaids and escrow: upfront payments for interest, insurance, and property taxes

How Much Are Closing Costs?

Most buyers pay between 2 and 5 percent of the loan amount. Here’s what that range looks like at a few common loan sizes:

Where you land in that range depends on:

• Location. State and local transfer and recordation taxes vary widely, and in some areas, they’re the single largest line item.
• Loan type. FHA and VA loans carry their own upfront fees, and investment property loans are often priced higher.
• Discount points. Paying points raises your upfront cost but lowers your rate.
• Insurance and title premiums. These rise with the home’s price and loan amount.

The fastest way to know your number is to see it on paper. Estimate your payment with our mortgage calculators, then request a personalized Loan Estimate.

When Will You Pay Each Cost?

Not everything is due on closing day. Some costs come earlier, so it helps to plan your cash in stages.

What’s Included in Closing Costs?

Closing costs encompass a lot of different fees in one package. There are so many different charges incurred when buying a house, and it is important to know what you are paying for.

Lender fees

Origination charges. This is what the lender charges to process and underwrite your loan. It appears in its own section of your Loan Estimate, so you can compare it directly across lenders.

Discount points (optional). Mortgage points are prepaid interest that buys down your rate. Whether points pay off depends on how long you keep the loan. Here’s a simple way to check:

Credit report. This is from pulling your credit history. It’s often paid when you apply.

Third-party fees

Appraisal. A licensed appraiser confirms the home’s value. If the appraisal comes in below your purchase price, you may need to renegotiate with the seller or cover the difference in cash, so it’s worth discussing that possibility with your agent before you make an offer.

Title search and title insurance. A title search confirms the seller has the legal right to sell and that no liens or claims are attached to the property. There are two title policies:

• The lender’s policy protects the lender and is required with a mortgage.
• The owner’s policy protects you, the buyer. It’s optional in most areas, but it’s a one-time cost that protects your ownership for as long as you own the home.

Settlement or closing fee. This is paid to the title company or attorney who conducts the closing. You typically choose your settlement company, often with your agent’s help. Their fees are set by the settlement company, not by the lender.

HOA fees. Buying in a community with a homeowners association? Expect fees for the resale disclosure package and, in some communities, a transfer fee or one-time capital contribution. These can add several hundred dollars or more, so ask your agent early.

Survey and other services. Depending on the property and location, you may also pay for a survey or a pest inspection.

Government taxes and fees

When a home changes hands, state and local governments charge taxes to transfer and record the deed and the mortgage. Rates, and who customarily pays them, vary by state and even by county. Some states and cities also reduce these taxes for first-time buyers, and certain reductions must be claimed when the contract is written, so mention it early if you’re buying your first home. Your Loan Estimate will show the figures for your address.

Prepaids and escrow

Prepaid interest. Mortgage payments cover the previous month’s interest, so at closing, you pay interest from your closing date through the end of that month. If you close on October 15, you’ll prepay interest for October 15 through 31, and your first full payment is due December 1.

Homeowners insurance. Lenders typically require the first year’s premium to be paid at or before closing.

Escrow deposit. If your lender pays your property taxes and insurance for you, you’ll make an initial deposit into an escrow account at closing so there’s enough on hand when those bills come due.

Property tax proration. Property taxes are split between buyer and seller based on who owned the home for which part of the tax period. If the seller already paid taxes that cover the time you’ll own the home, you reimburse them, and vice versa.

Mortgage insurance and required coverage

Private mortgage insurance (PMI). Required on most conventional loans when your down payment is less than 20 percent. Some PMI plans include an upfront cost at closing.

FHA, VA, and USDA fees. FHA loans include an upfront mortgage insurance premium. VA loans include a funding fee unless you’re exempt. USDA guaranteed loans include an upfront guarantee fee. These upfront program fees can generally be financed, subject to program requirements.

Flood insurance. If the home sits in a FEMA-designated flood zone, your lender will require flood insurance. First Heritage Mortgage checks FEMA flood maps on every loan, so you’ll know early.

Who Pays Closing Costs: Buyer or Seller?

Both. Buyers usually pay lender fees, the appraisal, the lender’s title policy, and prepaids. Sellers typically pay their own settlement fees, their listing agent’s compensation, and certain transfer taxes, depending on local custom.

Beyond custom, almost everything is negotiable. You can ask the seller to contribute toward your closing costs through a seller concession (also called a seller credit). The following are general agency guidelines. Actual limits vary by occupancy, loan-to-value (LTV) ratio, loan program and applicable rules:

• Conventional: generally 3 to 9 percent of the price for eligible primary-residence and second-home transactions, depending on LTV and occupancy
• FHA: generally up to 6 percent of the sales price, subject to program rules
• VA: certain seller concessions are generally limited to 4 percent of the reasonable value, while allowable payment of typical buyer closing costs is treated separately under VA rules

Your loan officer can confirm the applicable limit, and your agent can include the agreed concession in your purchase contract.

What about your buyer’s agent’s commission?

Since August 2024, following the NAR class-action settlement, most buyers sign a written agreement with their agent before touring homes. That agreement spells out how your agent will be paid. The seller may still agree to cover it, or you can ask for it as part of your offer. If the seller doesn’t cover it, you may pay it yourself at closing.

Whether you can pay it, and whether it counts toward your loan’s seller concession limit, depends on your loan program. Ask your loan officer before you write an offer to understand how the commission could affect your cash to close.

How to Lower Your Closing Costs

• Compare Loan Estimates. Every lender uses the same standardized form, so you can compare fees line by line.
• Shop your settlement services. Your Loan Estimate lists which services you’re allowed to shop for, and title and settlement fees can vary between companies.
• Ask for seller concessions. They’re especially realistic when a home has been on the market for a while.
• Consider lender credits. You can accept a slightly higher rate in exchange for a credit toward closing costs. That trade makes sense if you expect to sell or refinance within a few years.
• Look into assistance programs. Many state and local programs help with down payment and closing costs, especially for first-time buyers.
• Time your closing date. Closing later in the month means fewer days of prepaid interest. It lowers the cash you need at settlement, though not your total cost. Keep in mind the last few days of the month are the busiest for lenders and settlement companies, so build in a little cushion.

Before You Wire Funds: Protect Yourself from Fraud

You’ll usually send your cash to close by wire transfer. Always take precautions to protect yourself from common real estate scams. Scammers target this step with fake emails that look like they’re from your settlement company, agent or lender, asking you to send money to a new account.

• Verify by phone. Before wiring, call your settlement company at a number you already know, not one listed in the email.
• Treat changes as a red flag. Legitimate wire instructions rarely change at the last minute.
• Confirm receipt. Call the settlement company after you send the wire to confirm it arrived.

If you think you’ve sent money to the wrong account, contact your bank immediately and report it to the FBI at ic3.gov.

Selling and Buying at the Same Time?

If you’re selling your current home, you’ll have closing costs on both sides. A few things work differently:

• Your sale proceeds can fund your purchase. When the sale closes first or on the same day, your proceeds can go toward your down payment and closing costs. If the timing doesn’t line up, a bridge loan can help you buy before you sell.
• You’ll get your old escrow balance back. After your existing mortgage is paid in full, your servicer generally must return any remaining escrow balance within 20 business days, subject to applicable regulatory exceptions.
• Ask about title reissue rates. Some title insurers discount the new policy if the home was insured recently. Your settlement company can tell you if you qualify.

Buying an Investment Property?

Closing costs on a rental or second property follow the same basics, with a few differences:

• Lower concession limits. For eligible conventional investment property loans, the general agency guideline is a maximum 2 percent contribution, subject to LTV and program requirements.
• Reserves. Lenders typically require several months of payments in savings. It’s not a fee, but it affects how much cash you need.
• Pricing. Rates and points are often higher than on a primary residence.
• Taxes. Closing costs on rental property are often treated differently at tax time than on a home you live in. Talk with a tax professional.

First Heritage Mortgage offers conventional and specialty financing options for investors.

Can You Roll Closing Costs into Your Mortgage?

When you’re buying a home

Generally, no. On a purchase, the loan amount is based on the home’s price and your down payment, so closing costs usually need to be paid in cash or covered by credits. Some program-specific exceptions apply: FHA’s upfront mortgage insurance premium and the VA funding fee can generally be financed.

With eligible USDA guaranteed loans, the upfront guarantee fee may be financed, and eligible closing costs may be included in the loan when the appraised value supports an amount above the purchase price, subject to program limits. Seller concessions, lender credits and assistance programs are the usual ways to reduce what you bring to closing.

When you’re refinancing

Often, yes. If you’ve built enough equity, you may be able to add closing costs to your new loan balance when you refinance. How much you can finance depends on your home’s value and your loan-to-value ratio, which is how much you owe compared with what the home is worth. Borrowing less usually gets you better terms.

The trade-off is a higher loan balance and a slightly higher monthly payment. Paying closing costs from savings keeps your balance lower. A loan officer can show you both scenarios side by side.

Frequently Asked Questions (FAQ)

Every home and loan is different. If the home buying process looks scary, the best thing is that you don’t have to go through it on your own.

A First Heritage Mortgage loan officer will work with you through every step of the process to help you understand your costs and options at each stage. Get started with a free consultation today.