Closing Costs Explained

Closing costs are the fees and prepaid charges you pay to finalize a mortgage, separate from your down payment. They include lender charges, third-party services like appraisal and title, government recording fees and taxes, and prepaid items such as homeowners insurance and escrow deposits. You will see them first on your Loan Estimate and again, in final form, on your Closing Disclosure, so you can compare offers and check for changes before you sign.

What closing costs include

Closing costs fall into a few broad groups. The exact list depends on your loan, your property and where you live.

Lender charges

These are fees the lender charges to make the loan, such as origination, application, underwriting and processing fees. This group can also include discount points, which are an optional upfront charge you can pay to lower your interest rate. Each point is calculated as a share of the loan amount. Some lenders offer the opposite trade, called lender credits, which reduce your upfront costs in exchange for a higher rate.

Third-party services

Your lender will require certain services from other companies. Some you cannot shop for, such as the appraisal and credit report, because the lender chooses the provider. Others you may be able to shop for, such as the settlement or closing agent, title search and lender's title insurance, and in some cases a survey or pest inspection.

Taxes and government fees

State and local governments may charge fees to record the deed and mortgage, and some charge transfer taxes. These vary widely by location.

Prepaid items and escrow

Some costs are paid in advance at closing. These can include interest from your closing date to the end of the month, your first year of homeowners insurance and, in some areas, property taxes. If your loan has an escrow account, you will also make an initial escrow deposit, which is a cushion the servicer holds to pay future tax and insurance bills.

Other costs

Depending on your purchase, you may also see homeowners association fees, owner's title insurance (which is usually optional), home inspection fees and real estate commissions. Some of these may be paid by the seller, depending on your contract and local custom.

Where closing costs appear: the Loan Estimate

After you apply for a mortgage, the lender should send you a Loan Estimate within three business days. It is a standard form, which means every lender's Loan Estimate is laid out the same way. That makes it the main tool for comparing offers.

Page 2 of the Loan Estimate breaks out your closing costs:

• Section A: Origination charges. What the lender charges, including any points.
• Section B: Services you cannot shop for. Required services from providers the lender selects.
• Section C: Services you can shop for. Required services where you can choose your own provider.
• Section D: Total loan costs. The sum of A, B and C.
• Sections E through H: Other costs. Taxes and government fees, prepaids, initial escrow and other items.
• Section J: Total closing costs. Including any lender credits.

The form also shows your estimated cash to close, which is the total you will need to bring to closing after your down payment, deposits and credits are factored in.

Page 3 includes comparison measures. One is the annual percentage rate, or APR, which reflects the interest rate plus certain loan costs, expressed as a yearly rate, so you can compare the overall cost of credit between offers. Another is the Total Interest Percentage, which shows how much interest you would pay over the life of the loan relative to the loan amount. The form also shows how much you would pay in the first several years of the loan, which helps you see the effect of upfront costs.

How to compare closing costs between lenders

Ask for Loan Estimates from more than one lender, for the same loan type, on or close to the same day. Then compare them side by side:

• Start with Sections A and B. These are the costs that differ by lender and that you cannot change by shopping for providers.
• Check Section J for lender credits. Credits lower your upfront costs but usually come with a higher rate.
• Look at the interest rate and points together. A lower rate with more points and a higher rate with fewer points can each make sense, depending on how long you plan to keep the loan.
• Use the comparison measures on page 3. An offer with an appealing rate can still carry high upfront costs, so look at the full picture.

Do not assume the offer with the smallest upfront costs is the least expensive over time, or that the offer with the smallest rate is. The right answer depends on how long you expect to keep the loan.

Shopping for services

For the services listed in Section C, you can often choose your own provider, though your lender may need to approve the choice. Compare both cost and service, and ask for references. For title insurance, compare the bottom-line total rather than individual line items. A seller cannot require you to use a particular title company as a condition of the sale.

The Closing Disclosure: your final check

You should receive your Closing Disclosure at least three business days before closing. It shows the final terms and costs of your loan in a format that mirrors the Loan Estimate, so you can compare the two line by line.

When it arrives, check:

• Your loan amount, loan type, interest rate and estimated monthly payment
• Your total closing costs and cash to close
• Services you could not shop for, which should be similar to your estimate
• Services you shopped for, which should match what you agreed to pay
• Any seller credits
• The spelling of your name and the property address

What can and cannot change

Federal rules limit how much certain costs can increase between your Loan Estimate and closing. Some lender charges generally cannot increase at all, and some third-party costs can increase only within a limited tolerance. Costs can change for specific reasons, such as when information on your application changes, you change your loan, or your Loan Estimate expires before you move forward.

If you roll closing costs into your loan, your loan amount goes up. That reduces cash at closing but increases the interest you pay over time. If anything on your Closing Disclosure looks different from what you expected, ask your lender or settlement agent to explain it before closing. That window is there so you can resolve problems.

Ways closing costs may be reduced

• Compare Loan Estimates from several lenders.
• Shop for the services you are allowed to choose.
• Ask whether lender credits make sense for how long you plan to keep the loan.
• Negotiate seller credits as part of your purchase contract, where appropriate.
• Ask about state or local homebuyer assistance programs, which may help with some costs for eligible buyers.

Frequently asked questions

Next steps

• Mortgage Lenders
• Mortgage Refinance

Sources

• CFPB: Your home loan toolkit
• CFPB: Closing Disclosure explainer
• CFPB: What costs come with taking out a mortgage?