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
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
Worked example
A buyer in Columbus, OH purchases a home for $350,000 with 10% down ($35,000) on a conventional loan.
- 01Loan origination (0.75% of $315,000 loan) = $2,363
- 02Title insurance (lenders + owners) = $2,100
- 03Appraisal + inspection = $1,000
- 04Escrow/settlement fees = $750
- 05OH transfer tax (0.1%) + recording = $400
- 06Prepaid property tax + insurance escrow = $3,500
- 07Total closing costs ≈ $10,113, or 2.9% of purchase price
Result
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.
State-by-state variation
Closing costs vary significantly by state. Bankrate survey data shows average buyer closing costs (excluding transfer taxes) range from roughly $2,000 in low-cost states like Missouri and Indiana to over $6,000 in New York and Washington, DC. Transfer taxes add another 0-4% on top depending on the state and municipality.
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.
Overlooking transfer taxes in high-tax states
Some states and municipalities levy transfer taxes at closing that buyers often miss during budgeting. Delaware charges about 4%, Pennsylvania 2%, and many New York counties add 1-2%. On a $500,000 purchase, a 2% transfer tax is an additional $10,000 that does not appear on the initial Loan Estimate if the lender is out of state.
Industry Benchmarks
Source: Bankrate Closing Costs Survey