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.