What are closing costs and why they matter
Closing costs are fees that your mortgage lender or financing provider charges for processing and finalizing your home loan. These costs apply whether you buy your first home or your fifth one. When you plan your home purchase budget, you must include closing costs alongside your down payment.
Most buyers pay between 2% and 4% of the home’s purchase price in closing costs. For example, if you buy a $150,000 home, you can expect to pay around $3,000 to $6,000 at closing. These fees often surprise buyers, especially those who have never purchased a home before. Understanding them ahead of time helps you prepare and avoid last-minute stress.
Mortgage application and loan origination fees
Lenders charge application or loan origination fees to cover the cost of processing your loan. These fees apply from the moment you submit your mortgage application and provide your financial information. Banks, credit unions, and mortgage lenders all charge some form of origination fee.
This fee covers credit checks, income verification, underwriting, and administrative work. It represents the cost of creating and approving your loan.
Inspection fees
A home inspection is not always required, but most lenders strongly recommend one. An inspection helps identify the actual condition of the property before you finalize the purchase. Inspectors review major systems such as the roof, foundation, plumbing, electrical components, and structure.
An inspection protects you as the buyer by revealing issues that could require repairs. It also helps lenders feel confident that the property supports the loan amount.
Appraisal fees
Lenders require an appraisal to confirm the home’s market value. A licensed appraiser evaluates the property and provides a detailed report. Since lenders focus on risk rather than market trends, they rely on appraisals to ensure the home justifies the loan amount.
If the appraisal comes in lower than the purchase price, you may need to renegotiate or bring additional funds to closing.
Home warranty costs
A home warranty covers certain systems and appliances for a limited period after closing. This coverage can include appliances, electrical systems, plumbing, heating, and cooling. Buyers often choose a home warranty to reduce unexpected repair costs during the first year of ownership.
Some sellers offer a home warranty as part of the deal, but buyers may also purchase one at closing.
Property taxes at closing
Property taxes are typically paid twice per year. At closing, responsibility for property taxes transfers from the seller to you. You will reimburse the seller for any taxes they already paid that apply to your ownership period.
Your lender may also collect prepaid taxes to fund your escrow account, which they use to pay future tax bills on your behalf.
Mortgage points
Mortgage points allow you to reduce your interest rate. One point equals one percent of the loan amount. Paying points upfront can lower your monthly payment over time.
The number of points you choose depends on how much cash you have at closing and how long you plan to stay in the home. Buyers who plan to stay long term often benefit the most from paying points.
Final reminder
This list does not cover every possible closing cost. Fees vary by state, lender, and loan type. To understand your exact costs, ask your lender for a detailed loan estimate early in the process. Clear information helps you plan confidently and close without surprises.
