Closing Costs

Quick Definition

Closing costs are the fees and expenses paid by buyers and sellers at the closing (settlement) of a real estate transaction, separate from the down payment. Buyers typically pay 2-5% of the loan amount in closing costs. Sellers typically pay 6-10% of the sale price (mostly in real estate commissions). These costs cover lender origination fees, title insurance, appraisal, government recording fees, prepaid interest, homeowners insurance, and property tax escrow.

What It Means

Many first-time buyers are caught off guard by closing costs. If you are buying a $400,000 home with 20% down ($80,000), you also need $8,000 to $20,000 in closing costs. Your total cash needed at closing is $88,000 to $100,000+. Failing to budget for closing costs is one of the most common financial surprises in home buying.

The NAR settlement that took effect August 17, 2024 has also changed how buyer agent commissions factor into your closing costs. Buyers are now contractually responsible for their own agent's fee by default, though sellers can still agree to cover it as a concession.

Buyer's Closing Costs: Breakdown

Seller's Closing Costs

The NAR Settlement: What Changed in 2024 and 2025

The National Association of Realtors settled an antitrust lawsuit for $418 million in 2024. Two rule changes took effect August 17, 2024:

1. Buyer agent compensation offers were removed from MLS listings
2. Buyers must sign a written buyer-broker agreement before touring any home

The settlement did not eliminate seller-paid buyer agent commissions. Sellers can still agree to pay the buyer's agent, just off-MLS. In practice, most sellers continue covering buyer agent fees to attract buyers. According to Redfin data, buyer agent commissions dipped to 2.36% in Q3 2024, then rebounded to 2.42% by Q3 2025. The national average total commission sits around 5.7% in 2026, down slightly from pre-settlement levels.

Fannie Mae and Freddie Mac confirmed that seller-paid buyer agent commissions are exempt from interested party contribution (IPC) limits. That means paying your agent does not eat into the seller concession caps for closing costs. The settlement is under appeal in the Eighth Circuit (oral arguments heard January 14, 2026), but the practice changes remain in effect during the appeal.

The VA Home Loan Program Reform Act now permanently allows veterans to pay buyer-agent fees directly, removing a previous restriction that put VA buyers at a disadvantage.

The Loan Estimate and Closing Disclosure

Federal law (TRID/RESPA) requires lenders to provide two standardized documents:

Tolerance rules govern how much fees can change from LE to CD:

• Zero tolerance: Lender fees, owner's title if lender chooses provider
• 10% tolerance: Third-party services the lender selects
• No limit: Prepaid items, transfer taxes, homeowner's insurance

If fees change beyond tolerance, the lender must credit the borrower. You can read the full TRID requirements at consumerfinance.gov.

How to Reduce Closing Costs

Seller Concessions: The Hidden Negotiating Tool

In a buyer's market, sellers may agree to pay some of the buyer's closing costs:

Example: $400,000 home; buyer asks for 3% seller concessions ($12,000)

• Seller nets $388,000 instead of $400,000, effectively a price reduction
• Buyer uses the $12,000 to cover closing costs instead of cash
• Buyer preserves cash for down payment or reserves

Lender limits on seller concessions by loan type:

Remember: seller-paid buyer agent commissions are separate from these concession limits, per Fannie Mae and Freddie Mac guidance.

Real-World Example: Full Closing Cost Breakdown

Scenario: Buying a $450,000 home with 20% down ($90,000) on a $360,000 mortgage

Use our house affordability calculator to see how closing costs affect your total cash needed, or our rent vs. buy calculator to compare buying costs against renting.

Key Points to Remember

• Closing costs are separate from the down payment. Budget 2-5% of loan amount on top of your down payment.
• Buyers receive a Loan Estimate within 3 days of application and a Closing Disclosure 3 days before closing.
• Seller concessions can reduce buyer out-of-pocket costs, especially useful in buyer's markets.
• Shopping lenders on origination fees and comparing title company rates can save $1,000 to $3,000.
• No-closing-cost loans avoid upfront costs but increase the interest rate permanently.
• The NAR settlement changed how buyer agent commissions work, but most sellers still cover buyer agent fees.
• Seller-paid buyer agent commissions do not count against concession limits for Fannie Mae, Freddie Mac, FHA, VA, or USDA loans.

Common Mistakes to Avoid

• Forgetting to budget for closing costs: Many first-time buyers save for the down payment but forget the $8,000 to $20,000 in closing costs on top. Start saving for both simultaneously.
• Not shopping lenders: Origination fees, title insurance rates, and lender credits vary significantly. Get Loan Estimates from at least three lenders before committing.
• Ignoring the Closing Disclosure: Compare your CD against your LE. If fees jumped beyond tolerance limits, the lender owes you a credit. Many buyers never check.
• Waiving owner's title insurance: Lender's title insurance protects the bank, not you. Owner's title insurance protects your equity. Skipping it to save $700 to $2,000 is a risky gamble on what is likely your largest purchase.
• Not negotiating buyer agent compensation: Post-NAR settlement, buyer agent fees are negotiable. Some agents now charge flat fees of $3,000 to $5,000 instead of 2.5-3% of the purchase price. On a $400,000 home, that is a $5,000 to $7,000 difference.

Related Concepts

• Mortgage: The loan you are closing on
• Down Payment: The upfront cash portion, separate from closing costs
• Appraisal: The property valuation that costs $350 to $700 at closing
• Title Insurance: Protection against title defects, a major closing cost
• Escrow: The account that holds prepaid taxes and insurance
• Mortgage Points: Optional upfront payment to lower your interest rate

For more on the home buying process, read our guide on buying your first home or our analysis of whether to buy a home or invest your down payment.

Frequently Asked Questions

Q: Can closing costs be financed into the mortgage? A: For refinances, yes. Closing costs can typically be rolled into the new loan balance. For purchases, most loan programs do not allow financing closing costs directly into the mortgage. You need cash. Exceptions include VA loans (funding fee can be financed) and some USDA loans. Seller concessions are the closest equivalent for purchases. The seller pays costs from their proceeds, effectively financing them through a higher purchase price.

Q: Are closing costs tax-deductible? A: Most closing costs are not immediately deductible. Points paid to lower your mortgage rate on a primary home purchase are fully deductible in the year paid (if meeting IRS requirements). Property taxes prepaid at closing are deductible as property taxes. Other costs (title insurance, appraisal, origination fees, recording fees) are added to your cost basis, which reduces capital gains when you eventually sell.

Q: What happens to closing costs in a no-closing-cost mortgage? A: The lender covers all closing costs in exchange for a higher interest rate, typically 0.25 to 0.50% higher. On a $400,000 loan, that is $1,000 to $2,000 per year in additional interest, potentially for 30 years ($30,000 to $60,000 total). This trade makes sense only if you plan to sell or refinance within 3 to 5 years before the higher rate costs exceed the closing costs avoided.

Q: How did the NAR settlement change closing costs? A: The NAR settlement (effective August 17, 2024) removed buyer agent compensation from MLS listings and required written buyer-broker agreements before home tours. Buyers are now contractually responsible for their agent's fee by default. However, most sellers still agree to pay buyer agent fees as a concession to attract buyers. Total commission rates have dipped slightly, from around 5.5-6% to approximately 5.7% on average nationally. The settlement is under appeal but the rules remain in effect.