Buying a home comes with a host of expected and unexpected expenses—but one area that consistently catches first-time buyers off guard is closing costs. That’s why it’s essential to budget for closing costs well in advance. These fees are not optional, and failing to plan for them can derail your entire transaction.
Whether you’re buying your very first home or upgrading to your next one, understanding how to budget for closing costs will keep your deal on track and minimize financial surprises.
1. Why Every Buyer Should Budget for Closing Costs
Closing costs are the fees and expenses that must be paid to finalize your home purchase. They typically include legal services, title search and insurance, lender charges, and various government or third-party fees.
While some buyers assume they can negotiate these away, the truth is: you can’t avoid them completely. You can, however, budget for closing costs early and shop around to keep them manageable.
According to CoreLogic, the national average for closing costs with taxes is around $6,900. That’s a big-ticket line item if you haven’t planned for it.
2. The True Cost: Budget for Closing Costs by State
Depending on where you’re buying, the total amount you’ll need to budget for closing costs can vary widely.
In Colorado and California, closing costs average just 1% of the purchase price. But in places like Washington, DC (3.9%) or Delaware (5.4%), fees can be significantly higher.
These figures are a reminder to research local costs and budget for closing costs accordingly. A 5% fee on a $400,000 home is $20,000—definitely not “pocket change.”
3. Third-Party Services Add Up—Budget for Closing Costs Carefully
When you apply for a mortgage, lenders often recommend third-party service providers such as appraisers, attorneys, or title companies. You’re not required to use their suggestions, and it’s often worth exploring alternatives.
However, even with competitive quotes, these services aren’t free. You’ll need to budget for closing costs like courier fees, document prep, wire transfers, and more. Ask your lender to provide a Loan Estimate that outlines every potential fee.
4. Title Search and Legal Work: Why You Still Need to Budget for Closing Costs
One of the most essential closing fees is the title search. This ensures the property is legally transferable and free of liens. It also includes title insurance, which protects both you and your lender from title disputes after the sale.
Even if you find a low-cost provider, this step is non-negotiable. So make sure to budget for closing costs that include a proper conveyancer, attorney, or escrow company, depending on your state.
5. Insurance Bundles May Help You Budget for Closing Costs
Most mortgage lenders require proof of homeowners insurance before closing. If you already have car or life insurance policies, bundling these with the same provider could earn you a discount—helping you offset some of the costs.
Still, you must budget for closing costs that cover an entire year of prepaid homeowners insurance, plus any mortgage insurance or hazard coverage required by your lender.
6. Escrow and Interest: Hidden Costs You Must Budget For
On Closing Day, you’ll likely need to prepay:
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Your first month’s mortgage interest
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Property taxes
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Homeowners insurance premiums
These prepaid costs are easy to overlook, but they’re real—and they’re due in full at closing. Be sure to budget for closing costs that go beyond lender and legal fees.
7. “No-Fee Loans” Aren’t Free: Still Budget for Closing Costs
Some lenders offer “no-fee” or “zero-closing-cost” loans, which sound attractive. But the catch is: the fees are usually rolled into the loan amount or exchanged for a higher interest rate.
According to the Consumer Financial Protection Bureau (CFPB), buyers often end up paying more over time through these options. In most cases, it’s financially smarter to budget for closing costs and pay them upfront rather than financing them into your mortgage.
Final Thoughts: Budget for Closing Costs to Reduce Stress and Save Money
Aggregator Zillow reports that closing costs are one of the most stressful parts of the home-buying journey—and for good reason. They’re complex, variable, and sometimes unexpected. But if you take time early in the process to budget for closing costs, you’ll eliminate one of the biggest stressors in your transaction.
Using a closing cost calculator (like the one available on Zillow) can help you estimate your total fees. From there, you can shop around, compare rates, and get honest answers from your lender about what to expect.
Disclaimer: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.
