Buying a house is a major investment. Not only is it something you potentially pay for over the course of decades, it also comes with the need for some major upfront cash. While you don’t have to pay your real estate agent when you’re buying a house, most home loans require you to pay some type of down payment.

calculating closing costs

But what other costs come with buying a house?

Closing costs — and they can really add up. While closing costs may not make you change your mind about buying a home, they should be in your thoughts so that you can prepare yourself both financially and strategically when putting in a home offer.

Here’s everything you need to know about closing costs in order to avoid any last minute surprises.

What are closing costs?

Closing costs are paid at the time of settlement when a real estate property is being purchased. They’re an accumulation of various fees paid to multiple parties, oftentimes for services rendered leading up to the transaction. They can be paid either by the buyer or the seller (or sometimes, both).

Your closing costs shouldn’t come as a total shock, though. Your mortgage lender is required to provide you with an estimated breakdown at multiple points in the loan process. The estimate lists out all the different fees, as well as who is responsible for paying them.

In the end, you’ll see the total amount of money you’re expected to bring to closing. This amount includes your down payment and subtracts any seller or lender credits.

What fees are included in closing costs?

Closing costs can be broken down in a few different categories: lender fees, real estate fees, and mortgage insurance fees.

Lender Fees

These fees may vary depending on the mortgage lender you choose, but here’s a basic rundown to give you some of the most common costs you can expect.

Application Fee – Lenders sometimes charge for processing your loan application, which accounts for things like your credit check and administrative costs.

Attorney Fee – In some states, an attorney must review the paperwork on behalf of the buyer and lender. The fee can either be charged hourly or as a flat rate so talk to your lender about what to expect.

Broker Fee – If you use a broker to secure your mortgage, he or she may charge a commission fee. Usually, this costs between 1% and 2% of your home’s purchase price.

Origination Fee – Some lenders charge an origination fee, while others may not. It compensates the lender for administrative tasks and typically amounts to 1% of the loan amount.

Points – You can choose to pay points as prepaid interest in order to qualify for a lower rate and, usually, decrease your monthly payment. A point refers to one percentage point of your loan.

Prepaid Interest – Slightly different is prepaid interest. You generally don’t start making mortgage payments right after your loan closes, so this fee covers interest accrued between closing and your first payment.

Underwriting Fee – An underwriting fee compensates the lender for the loan approval process.

Real Estate Fees

Real estate fees are related to costs surrounding the property itself. Some are one-time fees, while others are recurring.

Appraisal Fee – An appraisal is required to determine the market value of the home you’re purchasing to make sure it’s worth the purchase price. Depending on your lender, you may have to pay before the appraisal occurs, or it may be rolled into your closing costs. Expect to pay around $500 to $600.

Property Tax – Property tax is usually an annual or biannual payment to your local city or county, but you prepay the bill as part of your monthly mortgage payment. However, most lenders require at least two months prepaid into your escrow account at closing.

Homeowners Insurance – This is another annual cost that is required to secure a home loan. Usually, the total annual bill is paid as part of closing, then you’ll start paying towards the next year’s bill as part of your mortgage bill.

Title Search and Insurance – The title search ensures you’ll be able to own the property outright and that there are no outstanding liens from other parties. Lender’s title insurance protects the lender in case someone else tries to stake a claim on the property. You can also purchase owner’s title insurance, which protects you in case any issues arise after you close on the home.

Transfer Tax – A transfer tax is generally paid to the local municipality to cover the administrative costs of transferring the deed.

HOA Fees – If your new home is part of a homeowners association, you may be required to pay a transfer fee. Your annual assessment may also be required upfront, depending on the specific HOA.

Mortgage Insurance Fees

When you pay less than 20% of your home purchase price as part of your down payment, you’re usually required to pay mortgage insurance. This is generally assessed as a monthly fee within your mortgage payment, but you may also have some costs at closing.

Upfront Mortgage Insurance Fee – Depending on your loan type and lender, you may have to pay an additional application fee for a loan with mortgage insurance. Additionally, some loans require that you pay a one-time fee at the time of closing on top of your annual fee throughout the mortgage.

Government-backed Loan Fees – If your loan is from the FHA, USDA, or VA then you may have extra mortgage insurance fees if your down payment is under 20%. For an FHA loan, it’s equal to 1.75% of your loan. The VA and USDA don’t charge mortgage insurance but instead have guarantee fees. VA fees fall between 1.25% and 3.3% while USDA fees are a flat 2%.

How do you calculate closing costs?

That list may seem huge and overwhelming, but there are some shortcuts you can take to estimate your closing costs before you even make an offer on a house. In general, closing costs usually amount to somewhere between 2% and 5% of your home’s purchase price.

Let’s look at that in real numbers.

Say you’re buying a house for $200,000. You can realistically expect your closing costs (not including your down payment) to extend anywhere between $4,000 and $10,000. That’s a pretty big range, so use that as a starting point when you begin to compare loan offers.

But don’t wait until you’ve fallen in love with a house to financially plan for closing costs.

Instead, use an online calculator early in the process to get a more specific estimate using real information like average property taxes in your area and costs associated with your loan type.

Still unsure about how much closing costs will be? A good lender can sit down with you in person or on the phone and walk you through the variables, including how different loan types can affect the cash you need to close.

Can you negotiate closing costs?

As you can see from the listing of the fees, some closing costs are negotiable while others are set in stone. The major ones to compare across loan offers are the lender variables, like origination fees, application fees, and broker fees. Don’t assume that a broker is automatically more expensive; you may be able to negotiate a lender credit to help lower your closing costs.

The other way to negotiate your closing costs is with the seller of your new home. It’s becoming more and more common for sellers to pay for closing costs because it’s difficult for many eligible homebuyers to save enough cash to purchase a home.

Your negotiation strategy with the seller really depends on the real estate market in which you live. If you’re buying a house in a slower area (or time of year), then you’re more likely to get a seller to pay your closing costs.

But if you’re in a much more competitive area with low housing inventory, it may be more difficult to get the amount you want. Still, even partially paid closing costs can be helpful in saving money at settlement.

Can closing costs be included in a home loan?

In some cases, you can roll your closing costs into the home loan, but you have to meet some basic requirements. First, it depends on your loan type, since not all loans allow you to do this. Most government-backed loans, like FHA and USDA loans, do offer the possibility to add closing costs to your home loan.

What’s the downside to this idea?

A higher loan amount means a higher monthly payment and a larger amount of interest paid over the life of your mortgage. Also, your new home needs to appraise for the higher amount you want to finance. Plus, your debt-to-income ratio needs to be able to support that larger monthly payment in order to qualify for such a loan.

If you’re getting a loan that doesn’t allow for closing costs to be rolled into the mortgage, you can still get around it — if you meet those criteria we just talked about.

Simply ask the seller (through your real estate agent) to pay for closing costs in exchange for paying the extra amount as part of the purchase price. Here’s an example.

If your $200,000 offer is accepted but you’re expected to pay $5,000 in closing costs, ask the seller to contribute $5,000 at closing and change your offer to $205,000. At the end of the day, the seller still walks away with the same amount of money.

Again, this strategy is contingent upon the numbers working for you, your financial situation, and your loan application.

How can you pay for closing costs at settlement?

When you finally get to closing day, it’s almost time to relax and move into your new home. But first, don’t forget to set up a way to pay your closing costs.

You can ask your lender or settlement company for the preferred payment method, but it most cases you can either get a cashier’s check from your bank or set up a wire transfer. There’s usually a minor fee associated with each one. It’s a quick and easy process, but shouldn’t be forgotten before you get to closing.