Closing Costs 101

Most people get a home loan when they purchase a new home. These loans are called mortgages and there are usually various expenses involved in obtaining them. That’s because a home is a big purchase and lenders want to protect themselves from liability whenever possible. 

These expenses are called closing costs. Closing costs can be anything your bank requires to close the loan—hence, the name “closing costs.” So, how much are closing costs and what are they for, exactly? That somewhat depends on the type of home you’re purchasing and other factors, but most people budget about three to five percent of the home’s total loan amount. Here’s everything you need to know about closing costs so you’re prepared for your first home purchase.

Typical Closing Costs

Closing costs usually depend on the lender. If the lender requires a certain inspection, they’ll expect you to pay for it. Sometimes, though, you may want inspections of your own. You may, for example, insist on having a home inspection. (Side note: You should always require a home inspection before closing.) You can ask the seller to pay for this inspection, but usually you pay for it yourself. It’s a closing cost because you have to pay for the inspection before you can close on the home.

So, what are typical closing costs? 


A property appraiser compares your home to similar homes in the area that have recently sold. They use this data to determine the value of your home. The lender usually requires an appraisal to make sure your home is worth what you’re paying for it. Appraisals usually cost a few hundred dollars.


A surveyor determines the legal boundaries of your home and land. Lenders usually only require a new survey if there isn’t a recent survey on record. You can expect to pay at least a few hundred dollars for this service.

Title Insurance

When you purchase a home, the title transfers to your name. During the closing process, a title company will verify that the title is legally available for transfer. Very rarely, mistakes happen. Title insurance helps protect you (and your lender) from expenses related to title mistakes.

Private Mortgage Insurance (PMI)

Most lenders ask for buyers to pay 20 percent of the loan’s value as a downpayment. This shows that you’re serious about your purchase and intend to repay the loan as agreed. Sometimes, buyers don’t have thousands of dollars lying around, though. In this case, you may put down less than 20 percent, and the lender may charge PMI to compensate for their added risk. PMI just helps the bank protect itself financially if you fail to pay the rest of the loan.

Mortgage Points

Some loans let you pay money upfront for a lower interest rate. These are mortgage points.

Attorney Fees

Some closings require an attorney, and attorneys rarely come cheap.

Closing Fee

Closings usually require an escrow company and their job is basically to make sure everything goes smoothly with the closing. Their closing fee is usually about one or two percent of the purchase price.

Property Tax

You’re usually required to pay some of your property taxes in advance. It may be six months or a year of tax, depending on local ordinances.

Homeowners Insurance

Likewise, you’re usually required to pay for homeowners insurance in advance. This may be six months to a year of insurance premiums, but you can shop around yourself for the best deal.

Miscellaneous Expenses

Miscellaneous expenses could be anything. The most common are credit report fees or courier/document delivery fees. The cost obviously varies.

Final Thoughts

So, do you have to pay all of these fees? Usually, yes, but some may be negotiable and services like Surveyors and Attorneys are less than common. Generally, you can ask your real estate agent for help. They can tell you whether a fee is normal and necessary or whether you should push back.

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