No Surprises at the Closing Table
Closing costs are one of the most frequently underestimated expenses in the home buying process. Averaging 2-5% of the purchase price, these fees can add $10,000 to $25,000 to the cost of buying a home. For a first-time buyer who has been focused on saving for a down payment, closing costs can come as an unwelcome surprise.
Understanding every fee you will encounter, which ones are negotiable, and how to minimize your total closing costs can save you thousands of dollars.
Lender Fees
These fees are charged by your mortgage lender for processing and underwriting your loan.
- Origination fee: 0.5-1% of loan amount. This is the lender's main fee for creating the loan. Negotiable, and some lenders waive it entirely.
- Application fee: $0-$500. Covers the cost of processing your application. Many lenders do not charge this.
- Underwriting fee: $400-$900. The cost of evaluating your creditworthiness and the loan risk.
- Credit report fee: $30-$50. The cost of pulling your credit reports from all three bureaus.
- Discount points: Optional. Each point costs 1% of the loan amount and typically reduces your rate by 0.25%.
Third-Party Fees
These fees go to independent service providers involved in the transaction.
Appraisal fee: $400-$700. Required by the lender to verify the home's value supports the loan amount. You choose the appraiser, but the fee is generally non-negotiable.
Home inspection fee: $300-$500. While technically optional, skipping a home inspection is almost never advisable. This fee covers a thorough evaluation of the property's condition.
Title search and insurance: $1,000-$3,000. Title insurance protects you and the lender against claims on the property's ownership. The title search verifies that the seller has clear ownership.
Survey fee: $300-$600. Verifies the property boundaries and identifies any encroachments or easements.
Attorney fees: $500-$2,000. Required in some states, optional in others. An attorney reviews documents and represents your interests at closing.
Prepaid Costs and Escrow
These are not fees per se but upfront payments for ongoing expenses that your lender will manage through an escrow account.
"The biggest shock for first-time buyers is not the closing costs themselves but the escrow impounds. Having to prepay several months of property taxes and insurance on top of everything else can add $3,000-$5,000 that many buyers do not anticipate." — Dale Vermillion, mortgage industry trainer and author
Prepaid items typically include property taxes prorated from closing date to the end of the tax period, homeowners insurance premium for the first year, prepaid interest from closing date to the first mortgage payment, and escrow account deposits of two to three months of taxes and insurance.
How to Reduce Your Closing Costs
Several strategies can meaningfully reduce your closing costs. Compare Loan Estimates from multiple lenders and use them as leverage to negotiate lower fees. Ask the seller to contribute toward closing costs, which is common in buyer-friendly markets. Inquire about lender credits, where the lender covers some closing costs in exchange for a slightly higher interest rate. Close at the end of the month to minimize prepaid interest charges.
