Closing Costs
The fees and expenses paid at the closing of a real estate transaction, separate from the down payment.
Definition
Closing costs cover everything required to complete a property purchase or refinance beyond the actual down payment or cash to close. For buyers, typical closing costs include loan origination fees (0.5% to 1% of the loan), appraisal ($500 to $800), title insurance ($700 to $2,500), escrow and settlement fees, recording fees, prepaid interest, first month property tax escrow, insurance premiums, and various smaller fees. Total closing costs usually run 2% to 5% of the purchase price for buyers, though investment property loans trend toward the higher end. For refinances, closing costs cover many of the same items but exclude owner's title insurance and the big appraisal savings, usually totaling 1.5% to 3% of the new loan amount. Investors should underwrite closing costs as a known expense, not a surprise, and should track them carefully because they are partially deductible. Loan origination fees (points) and mortgage interest are deductible on Schedule E. Appraisal, title insurance, and recording fees are added to the property's cost basis and depreciated over 27.5 years rather than deducted in the year paid.
Example
Purchase price $180,000 with 25% down ($45,000). Loan amount $135,000. Closing costs run approximately 3% of purchase price = $5,400. Total cash to close = 45,000 + 5,400 = $50,400.
Frequently asked
Are closing costs tax deductible?
Some. Origination fees (points) and prepaid interest are deductible on Schedule E. Title insurance, appraisal, and recording fees are added to cost basis and depreciated.
How much are closing costs on an investment property?
Typically 2% to 5% of the purchase price. Investment property loans trend toward the higher end because of stricter underwriting and slightly higher fees.
Can closing costs be financed into the loan?
On refinances, often yes. On purchases, usually no, because lenders require the closing costs to be paid from the borrower's own funds at closing.
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