Closing Costs Explained
Closing costs are the fees and expenses you pay when finalizing a mortgage. Knowing what to expect helps you budget and avoid surprises at the closing table.
Closing costs are the various fees and charges associated with completing a real estate transaction. They are paid at the closing of the mortgage and can include lender fees, third-party services, government charges, and prepaid items. According to the CFPB, closing costs typically range from 2% to 5% of the loan amount, though the exact amount depends on your loan type, location, and lender.
Common Closing Cost Categories
Lender Fees
These may include an origination fee, application fee, underwriting fee, and discount points. Lender fees compensate the mortgage company for processing and funding the loan.
Title & Settlement Fees
Title insurance protects the lender and buyer against claims on the property. Settlement fees cover the costs of the closing agent who facilitates the transaction and records the deed.
Appraisal & Inspection
An appraisal determines the fair market value of the property. A home inspection (while typically optional) evaluates the condition of the home. Both help protect your investment.
Prepaid Items
These are costs paid in advance at closing, such as homeowners insurance premiums, property taxes, and prepaid interest (the interest that accrues between closing day and your first mortgage payment).
Typical Closing Cost Line Items
- Loan origination fee — compensates the lender for processing the loan
- Appraisal fee — pays for a professional property valuation
- Credit report fee — covers pulling your credit history
- Title search and title insurance — verifies ownership and protects against title defects
- Recording fees — government charges for recording the new deed and mortgage
- Escrow deposits — funds set aside for future property tax and insurance payments
- Prepaid interest — interest charges from closing day through the end of the month
- Homeowners insurance — first year's premium typically due at closing
The Loan Estimate and Closing Disclosure
Federal law requires lenders to provide a Loan Estimate within three business days of receiving your mortgage application. This standardized form breaks down your estimated closing costs, interest rate, and monthly payment. Before closing, you will receive a Closing Disclosure that shows the final costs. The CFPB recommends carefully comparing these two documents to identify any changes.
Some closing costs are negotiable, and sellers may agree to pay a portion of your closing costs as part of the purchase agreement. Your loan officer can explain which costs can be negotiated and what seller concessions may be allowed for your loan type.
How to Prepare for Closing Costs
- Budget for closing costs in addition to your down payment
- Review your Loan Estimate carefully and ask your loan officer about any unfamiliar fees
- Shop around for third-party services like title insurance and home inspections
- Ask about lender credits or seller concessions to offset costs
- Compare your Closing Disclosure against the Loan Estimate before signing
Sources
- Consumer Financial Protection Bureau. Closing Costs and Your Mortgage
- U.S. Department of Housing and Urban Development. Buying a Home — Settlement Costs