What are closing costs?

Closing Costs, Explained Without the Jargon

Closing costs have a way of showing up in a conversation and immediately making buyers nervous, mostly because nobody quite explains what's actually in that number. So let's just lay it out plainly.

Closing costs typically run somewhere between two and five percent of the purchase price, though the exact number depends on your loan type, your lender, and where you're buying. On a decent sized purchase, that's a real number worth planning for well before you're staring at a settlement statement the week of closing.

Here's roughly what's actually in there.

- Loan origination fees, which is essentially what your lender charges for putting the loan together.
- Appraisal fees, covering the professionals who confirmed the home's value and condition.
- Title insurance, which protects you and your lender against any ownership disputes that might surface later.
- Escrow fees, for the neutral third party managing the whole transaction.
- Prepaid items like property taxes and homeowners insurance, which get collected upfront to set up your ongoing payment structure.
- Agent fees, the amount you agreed to pay your agent is lumped into closing costs.  As a buyer, you may be negotiating with the seller to have this fee added to their balance sheet.

A few things buyers don't always expect. Some of these costs are negotiable, and in certain situations, sellers can be asked to cover a portion of them as part of the offer. This varies a lot by market conditions, so it's worth an honest conversation about what's realistic in your specific situation rather than assuming it either will or won't happen.

Your lender is required to give you a Loan Estimate early in the process and a Closing Disclosure a few days before closing, both of which break down these costs in detail. Actually reading these documents, rather than skimming past them, is one of the more useful things you can do for yourself during the process.

If a number on either document looks unfamiliar or higher than you expected, ask. This is exactly the kind of thing worth clarifying before closing day, not during it, when you're signing what feels like your fortieth document in a row.