Most people think of the down payment as the big check they have to write to buy a home. But there is a second cash requirement that surprises many first-time buyers: closing costs. These are the fees, taxes and prepaid items that come due when your loan and your purchase finalize. Understanding them early makes your budget more accurate and helps you compare lenders honestly.
Short answer: Closing costs are the lender fees, third-party fees, government charges and prepaid items due at closing. They are separate from your down payment. Your Loan Estimate lists them, and the Closing Disclosure confirms the final amounts. The figures in this article are examples, and your actual costs will differ.
What closing costs include
Closing costs fall into a few categories. Your Loan Estimate and Closing Disclosure organize them in a standard way, so once you know the groups, the forms become easy to read.
1. Lender charges
These are paid to the lender for making the loan.
- Origination charges. Fees for processing, underwriting and funding the loan. Some lenders charge them as individual line items, others as a combined fee.
- Discount points (optional). Money you pay upfront to lower your interest rate. Whether points make sense depends on how long you plan to keep the loan.
- Lender credits (optional). The opposite of points: the lender gives you a credit toward closing costs in exchange for a higher rate.
2. Third-party services
These are paid to people other than the lender who help complete the transaction.
- Appraisal. A professional estimate of the home’s value.
- Credit report fee.
- Title services. A title search, lender’s title insurance and settlement or closing fees.
- Flood determination and other reports, where applicable.
- Survey, pest inspection or other property-specific items, depending on the location and the contract.
Some of these are fees you can shop for, and some are required services you cannot choose.
3. Taxes and government charges
- Recording fees to register the deed and the mortgage with the local government
- Transfer taxes, where they apply. They vary significantly by state and locality, and sometimes the seller pays them
4. Prepaid items and escrow deposits
These are not “fees,” but they require cash at closing:
- Prepaid interest for the days between closing and the end of the month
- Homeowners insurance premium, often the first year’s premium paid in advance
- Property tax and insurance deposits to start your escrow account, which the servicer uses to pay these bills for you
Escrow deposits can be a large part of your cash to close. They are not a lender profit. They are your own money set aside to pay bills that are coming.
5. Other costs
HOA transfer fees or capital contributions, home warranty premiums if you choose one, and attorney fees if your state uses attorneys at closing.
How much should I expect to pay?
The amount depends on where you live, the price of the home, your loan type and whether you have discount points or credits. As a general planning rule, many buyers see closing costs equal to 2% to 5% of the purchase price, but your own Loan Estimate is the only reliable number. Treat any general percentage as a rough planning range only, and ask for a Loan Estimate early so you are not surprised.
How to read your Loan Estimate
Within three business days after you submit a complete application, your lender must give you a Loan Estimate. It is a standardized three-page form, which means you can compare lenders line by line.
Look at these sections:
- Loan terms. Loan amount, interest rate, monthly payment, and whether the rate or balance can change.
- Projected payments. Principal and interest, mortgage insurance and estimated escrow.
- Costs at closing. Estimated closing costs and “cash to close,” which combines your down payment and closing costs, minus any deposits and credits.
- Page 2: closing cost details. Lists every fee in sections A through J.
- Page 3: comparisons. Shows total costs over five years, the APR and the total interest percentage so you can compare offers.
When you compare lenders, check the interest rate, but also check the origination charges, points and credits. A lower rate with higher fees may or may not be better, depending on how long you will keep the loan.
Which costs can change?
Federal rules put the closing costs into three groups:
- Fees that cannot increase (with limited exceptions), such as the lender’s origination charges
- Fees that can increase by up to a set percentage in total, such as recording fees and third-party services that you chose from the lender’s list
- Fees that can change without a limit, such as prepaid interest, property insurance, escrow deposits and services you selected from outside the lender’s list
If something changes in your situation or the transaction, such as a change in loan amount or a delay in locking your rate, the lender may be able to issue a revised Loan Estimate. At least three business days before closing, you must receive the Closing Disclosure, which shows your final costs. Compare it with your Loan Estimate and ask questions about anything that looks different.
Ways to reduce what you pay at closing
You have more options than people think.
- Negotiate seller concessions. In many markets and loan programs, the seller can agree to pay part of your closing costs, within program limits.
- Shop for services. Get quotes for title and settlement services that are on your shoppable list.
- Compare lender fees. Request Loan Estimates from several lenders, and ask each to explain every line item.
- Consider lender credits. Accepting a higher rate in exchange for credits can reduce cash to close, but you will pay more interest over time. It is a trade-off.
- Time your closing. Closing near the end of the month reduces prepaid interest, although other factors usually matter more than timing.
- Use assistance programs. Some state and local programs offer help with down payment and closing costs. See our first-time homebuyer guide.
- Ask about gifts. Many loan programs allow gift funds from acceptable donors with proper documentation.
Should I pay discount points?
Points reduce your interest rate in exchange for an upfront fee. They can make sense if you expect to keep the loan for a long time, because the monthly savings eventually exceed the upfront cost. If you might sell or refinance in a few years, points often do not pay off. Ask your loan officer to show the “break-even” point, which is how many months it takes for the monthly savings to equal the upfront cost.
A word on “no closing cost” loans
Some offers advertise loans with no closing costs. In practice, someone still pays. The costs may be built into a higher interest rate through lender credits, or added to the loan balance. This can be a legitimate way to reduce cash upfront, but it is not free. Compare the long-term cost and ask for the details in writing.
Closing costs on a refinance
A refinance has closing costs too, including an appraisal in many cases, title services, and lender fees. You can often finance them into the new loan, which increases the balance. Before refinancing, calculate how long it will take for the monthly savings to cover the costs. See our home equity guide for how this compares with a cash-out refinance, HELOC or home equity loan.
Get a Loan Estimate for your situation
The only way to know your closing costs is to apply and review a Loan Estimate. If you are planning, start with a pre-approval, or call (760) 713-3814 to talk with Bethany Sanchez (NMLS #2425491) about a realistic cash-to-close budget. This article is for general education and uses example categories only. It is not a Loan Estimate, a quote or a commitment to lend.
Frequently asked questions
How much are closing costs on a mortgage?
Closing costs vary by location, loan type and price, and they commonly run a few percent of the purchase price. Your Loan Estimate shows the actual figures for your loan, and it is the best source for planning. Ask for one early so you can compare lenders on the same form.
Can the seller pay my closing costs?
Sometimes. Many loan programs allow seller concessions up to a limit that depends on the loan type and down payment. The contract has to include the concession, and the limit applies to the transaction, so talk to your agent and loan officer before you write the offer.
What is the difference between closing costs and a down payment?
The down payment goes toward the price of the home and builds your equity. Closing costs are fees and prepaid items paid to the lender, third parties and sometimes local governments to complete the transaction. You generally need money for both.
Can I roll closing costs into my loan?
In some cases, yes. Certain programs let you finance some costs, and in a refinance it is common to finance them into the new balance. This increases the loan amount and the interest you pay over time, so compare the long-term cost with paying cash.
Can closing costs change between the Loan Estimate and closing?
Some can. Federal rules limit how much certain fees can increase from the Loan Estimate, while other items, such as prepaid taxes and insurance or services you choose outside the lender's list, can change without those limits. The Closing Disclosure shows the final numbers, and you receive it at least three business days before closing.
Can I shop for services like title insurance?
For many third-party services, yes. Your Loan Estimate separates services you can shop for from those you cannot. If you choose your own provider from outside the lender's list, those fees can change without the same limits, so get quotes in writing.