Closing Costs Breakdown: What They Are & Common Fees

Understand what you pay at closing, why the costs exist, and how to estimate your true cash-to-close.

Closing costs are the upfront expenses required to finalize a mortgage. They often surprise first-time buyers because they come on top of the down payment. This guide breaks down the most common fees, explains who pays them, and shows how to budget accurately.

• Lender vs third-party fees
• Prepaid items vs true closing costs
• Typical cost ranges
• Ways to reduce upfront expenses

Important: Closing costs vary by lender, loan type, property location, and timing. Two loans with the same rate can still have very different cash-to-close.

What are closing costs?

Closing costs are the fees and prepaid expenses required to complete a mortgage transaction. They cover the lender’s work, third-party services, and advance payments for items like property taxes and homeowners insurance.

On average, closing costs for a purchase typically range from 2% to 5% of the loan amount, though this can vary widely.

Common lender fees

These fees are charged by the lender to process, underwrite, and fund the loan. Some may be negotiable, especially when comparing offers.

Origination fee: Compensation for creating the loan (sometimes shown as points).
Underwriting fee: Cost to review and approve the loan.
Processing fee: Covers administrative work during the application.
Rate lock fee: Sometimes charged to lock your interest rate for a period.

Tip

Ask lenders for a version of the quote with zero points so you can clearly see which costs are fees versus rate buy-downs.

Third-party closing costs

These fees pay independent service providers required to complete the transaction. They’re usually not controlled by the lender.

Appraisal fee: Determines the home’s market value.
Title search & title insurance: Confirms ownership and protects against title defects.
Escrow or settlement fee: Paid to the company that handles closing.
Recording fees: Charged by local governments to record the transaction.
Credit report fee: Cost to pull your credit.

Prepaid items (often confused with closing costs)

Prepaids are advance payments for future expenses. While paid at closing, they are not technically fees.

Homeowners insurance premium: Usually 6–12 months paid upfront.
Property taxes: Initial escrow funding.
Prepaid interest: Covers interest from closing to your first payment date.

Why prepaids vary: Your closing date, tax schedule, and insurance provider can all affect how much you prepay.

Who pays closing costs?

Buyers usually pay most closing costs, but sellers may cover some fees depending on the contract and local market norms.

Buyers typically pay lender fees, appraisal, credit report, and prepaids.
Sellers often pay real estate commissions and may offer closing cost credits.
Credits can be negotiated, especially in buyer-friendly markets.

How to reduce closing costs

Compare Loan Estimates. Fees vary more than rates.
Negotiate lender fees. Especially origination and processing charges.
Ask for seller credits. Common in slower markets.
Consider a slightly higher rate. Lender credits can offset upfront costs.

How closing costs fit into the bigger mortgage picture

Closing costs interact with your interest rate, loan type, and timeline. Understanding how they work helps you avoid surprises and compare offers accurately.

Keep learning

For a full foundation on mortgage terms and costs, read The Ultimate Guide to Mortgage Basics.