What is US Closing Costs?
Closing costs are the fees paid by a buyer (and seller) at closing when a US home purchase is finalized. They typically run 2-5% of the purchase price for buyers and include loan origination, title insurance, escrow, appraisal, inspection, transfer taxes, recording fees, and prepaid property taxes and insurance. Understanding closing costs is essential for budgeting your purchase. Check your borrowing power with the Home Affordability Calculator and monthly costs with the Mortgage Calculator.
The Formula
Total Closing Costs = Origination + Title + Escrow + Appraisal + Inspection + Transfer Tax + Recording + Prepaids Rule of Thumb: 2-5% of purchase price for buyers, 5-10% for sellers (including agent commission)
Origination runs 0.5-1% of loan. Title insurance (lenders and owners) runs $1,000-3,000. Transfer taxes vary by state, 0% in TX, AK, ID to 4% in DE. Prepaids include 6-12 months of property tax and insurance escrow.
Worked Example
A buyer in Columbus, OH purchases a home for $350,000 with 10% down ($35,000) on a conventional loan.
- Loan origination (0.75% of $315,000 loan) = $2,363
- Title insurance (lenders + owners) = $2,100
- Appraisal + inspection = $1,000
- Escrow/settlement fees = $750
- OH transfer tax (0.1%) + recording = $400
- Prepaid property tax + insurance escrow = $3,500
- Total closing costs ≈ $10,113, or 2.9% of purchase price
📌 Closing costs of about $10,100 on a $350,000 home, 2.9% of purchase price. Combined with the $35,000 down payment, the buyer needs roughly $45,100 cash to close, plus reserves required by the lender.
Why This Matters
Cash requirement
Closing costs are paid in cash at closing alongside your down payment. On a $500,000 home with 10% down, budget $12,500-25,000 in closing costs plus the $50,000 down payment, a significant amount that must be documented and seasoned in your bank account.
Seller concessions
Buyers can negotiate seller-paid closing costs in the purchase contract. Conventional loans allow up to 3-9% depending on LTV; FHA allows up to 6%; VA allows 4% plus reasonable discount points. In slow markets sellers frequently agree to 2-3% concessions to keep the deal together.
Common Mistakes
❌ Not shopping lenders on closing costs
The CFPB requires lenders to issue a Loan Estimate (LE) within 3 business days of application. Shopping 3 LEs on a like-for-like basis often reveals $2,000-5,000 in savings on origination, discount points, and title fees. The CFPB even provides a free LE comparison tool.
❌ Forgetting prepaids are additional to closing costs
Prepaid interest (days remaining in the month), first-year homeowners insurance ($1,500-3,500), and 2-3 months of property tax escrow are often listed on the Closing Disclosure but feel like surprises. Budget an extra 1-2% on top of the "closing costs" quoted upfront.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| Closing costs as % of price (buyer) | Below 3% | 3-4% | Above 5% |
Source: Bankrate Closing Costs Survey
Benchmark data sourced from Bankrate Closing Costs Survey.