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What Are Closing Costs and How Do they Work When Buying a Home?

January 26, 2024

Closing costs are one of the most important components of purchasing a home. Whether you’re buying new or pre-owned, these expenses help cover the services associated with the homebuying process. 

Find out what you need to know about closing costs: 

What Are Closing Costs? 

Closing costs are the expenses a homebuyer incurs during the purchase of their home. These expenses are paid at the time of closing along with the down payment and any other prearranged payments. 

It takes time and money — and plenty of work behind the scenes — to ensure that a home is purchased correctly. One simple way to think about closing costs is that they are fees resulting from processing and transferring ownership of the home from one entity to another. 


What Are Included in Closing Costs?  

Closing costs differ depending on the buyer. In general, they can include expenses associated with ... 

  • State and federal taxes 
  • Title insurance 
  • Title search 
  • Lawyer fees  
  • Financing costs 
  • Appraisal fees 
  • Underwriting fees 
  • Credit check fees 
  • Items that must be prepaid or escrowed 
  • Plus, other costs 


How Much Will I Pay in Closing Costs?  

As Rocket Mortgage indicates, closing costs vary from one buyer to the next and depend on where a person lives and the type of loan they take out. 

Typically, closing costs range from 2% to 6% of the cost of a loan, though for builders like Legend Homes, they can vary between 2.5% and 3.5%. This means that if you purchased a home for $250,000, you might anticipate closing costs coming in between $5,000 and $15,000. 

With this in mind, not every buyer uses the same kind of loan when they purchase a home. Costs are typically capped depending on loan type: 

  • Conventional Loans: Up to 9% of the cost of the loan or appraised value (whichever is lower) 
  • USDA Loans: Up to 6% of the cost of the loan 
  • VA Loans: Up to 4% of the cost of the loan 
  • FHA Loans: Up to 6% of the cost of the loan 


What Else to Know About Closing Costs 

The best way to prepare to pay for closing costs is to chat with your sales professional, REALTOR (if you're working with one), and loan officer. 

These experts will help you navigate the various fees and taxes associated with closing costs — and any other questions you may have about the homebuying process. If you’re interested in learning more about other key terms associated with buying a home, check out this helpful list of important terms to know. 

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Legend Homes is dedicated to an easy and exceptional homebuying experience. We deliver innovative home designs, loaded with value-added features at exceptional affordability. We build in premier Texas communities, where you will feel right at home.

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