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Closing Costs Explained: What New Buyers Need to Know
AHS Home Team
April 24, 2025
Buying a home is a big investment, and while most buyers plan for a down payment, they’re often surprised by additional expenses known as closing costs. These costs cover a variety of fees required to complete your loan and it can add up to a sizable chunk of cash.
In total, house closing costs typically range from 2% to 5% of the loan amount, which can equal thousands of dollars. Understanding what’s included and knowing how to manage these costs can make the process smoother and help you save.
What are closing costs?
Closing (or settlement) costs are the fees and expenses you pay when finalizing a mortgage loan, whether you’re purchasing a home or refinancing an existing mortgage.
These costs are additional to your down payment and include charges for services needed to process, approve, and document the loan, as well as to legally transfer ownership (in a home purchase) or update loan terms (in a refinance).
Key components of closing costs
As we’ll discuss below, house closing costs can include a wide range of fees. In general, though, they fall into three different categories:
- Lender Fees: Charges from the lender, such as loan origination and application fees.
- Third-Party Fees: Fees for services provided by other parties, like appraisal, inspection, and title insurance.
- Government Fees: Charges for recording the transaction and taxes imposed by local or state governments.
How to calculate your closing costs
Calculating your settlement costs is simple when you use a percentage range. House closing costs typically range from 2% to 5% of your loan amount. To estimate your costs, multiply your loan amount by this range.
For example, on a $200,000 mortgage:
- 2% of $200,000 = $4,000
- 5% of $200,000 = $10,000
Your settlement costs in this case would likely fall between $4,000 and $10,000. Keep in mind that some of these fees are negotiable, so it’s smart to shop around and compare lenders to secure the best possible terms.
When closing costs are paid
Settlements costs are generally paid at the time of closing—when the loan is finalized. For home purchases, they’re usually due along with the down payment. In refinancing, they’re included in the closing and may be paid upfront, added to the loan balance, or covered by the lender in exchange for a slightly higher interest rate.
What is included in closing costs?
Closing costs cover a long list of services necessary to successfully complete a real estate transaction. Those fees and services often include:
| Fee | Description | Cost* |
| Application Fee | Covers the cost of processing the loan application and checking your credit. | $75-$500 |
| Appraisal Fee | Pays for a professional evaluation of your property’s market value. | $300-$600 |
| Attorney Fees | Covers legal services for preparing and reviewing documents, sometimes required by state law. | $500-$1,200 |
| Closing Fee | Charged by the title or escrow company for managing the closing process. | $500-$1,000 |
| Courier Fee | Covers the cost of transporting documents for signing and delivery. | $25-$50** |
| Escrow Funds | An account to cover initial property tax and insurance payments held by the lender. | 2-6 months of tax and insurance payments |
| FHA Mortgage Insurance | An upfront premium for FHA loans, protecting lenders in case of default. | 1.75% of the loan amount |
| Flood Certification | Determines if your property is in a flood zone and requires flood insurance. | $15-$25 |
| HOA Transfer Fee | Pays for transferring ownership information in a homeowners’ association. | $100-$400 |
| Homeowners Insurance | Pays for a year of homeowners insurance, required by the lender. | $300-$1,000 |
| Lead-Based Paint Inspection | Optional inspection for lead paint in homes built before 1978. | $200-$400 |
| Lender’s Title Insurance | Protects the lender against title disputes or defects. | $500-$1,000 |
| Loan Origination Fee | A fee to cover lender expenses for processing and originating the loan. | 0.5%-1% of the loan amount |
| Owner’s Title Insurance | Protects you as the buyer from potential title issues after purchase. | $500-$1,500 |
| Pest Inspection Fee | Inspection for termites or pests, sometimes required by the lender. | $75-$150 |
| Prepaid Daily Interest Charges | Covers interest from closing day to the start of the next payment cycle. | Varies |
| Private Mortgage Insurance | Required if the down payment is less than 20%, covering lender risk. | 0.3%-1.5% of the loan amount annually |
| Property Tax | Prepaid property taxes that will be held in escrow and paid by the lender. | Varies |
| Rate Lock Fee | Fee to lock in your interest rate for a specified period before closing. | 0.25%-0.5%*** |
| Recording Fee | Local government fee for recording the deed and mortgage. | $25-$250 |
| Survey Fee | Fee for a survey to confirm property boundaries and identify any issues. | $150-$400 |
| Title Search Fee | A search of public records to verify the property’s ownership and uncover any liens. | $75-$200 |
| Transfer Tax | Local or state tax for transferring property ownership. | 0.1%-0.2% of the sale price |
| VA Funding Fee | Fee for VA loans to help support the VA loan program. | 1.25%-3.3% of the loan |
*Costs have been estimated based on industry averages throughout the United States. Final settlement costs may vary by location and lender.
**May be waived, especially for electronic documents
***Many lenders offer this for free
Who pays closing costs?
Typically, both the buyer and the seller share responsibility for closing costs in a real estate transaction, although the specifics depend on the terms of the sale and any local regulations.
For home purchases, the buyer usually pays for most of the costs associated with the mortgage, such as loan origination fees, appraisal fees, and insurance. The seller, on the other hand, often covers costs related to the property transfer, including real estate agent commissions and transfer taxes.
However, it’s possible for buyers or homeowners to negotiate with lenders or sellers to cover certain costs or offer credits to help offset these expenses, which is sometimes referred to as “seller concessions” in a purchase.
How to reduce settlement costs
Reducing settlement costs is possible with a few strategic steps:
- Shop Around. Meet multiple lenders and compare their closing cost estimates—many lenders offer competitive terms or may even waive certain fees to earn your business.
- Negotiate. Talk with your lender to see if they can reduce or waive fees, like the application or origination fee.
- Look For Lender Credits. The lender may cover some costs in exchange for a slightly higher interest rate.
- Ask For Seller Concessions. If you're buying a home, negotiate for the seller to cover a portion of your closing costs as part of the deal.
- Close At the End of the Month. This can reduce prepaid daily interest charges and lead to a smaller initial escrow payment, saving you some cash upfront.
Find more advantages with American Home Shield®
Closing on a house is a milestone to be proud of—but it also marks the beginning of your journey as a homeowner. Protect the investment you’re making by adding an American Home Shield home warranty plan to your closing. With plans offering coverage for up to 23 of your home’s major systems and appliances, a home warranty offers financial protection in the face of unexpected breakdowns as you move forward with the purchase and into your new home.
Add one of our real estate plans tailored for homebuyers and real estate agents to your closing package and protect your peace of mind from day one.
AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.
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