Understanding Closing Costs When You Buy a Home

When you buy a home or condo, the purchase price is not the only check you will write. Closing costs are the fees and prepaid expenses that come with finalizing a mortgage and transferring ownership. They can add a meaningful amount to the cash you need at closing, so it pays to understand them early.

This article is general information. Fees and who pays them vary by state, lender and local custom.

Where you will see closing costs

Federal rules give borrowers two standardized forms. The Loan Estimate arrives within three business days after you apply for a mortgage and lists estimated costs. The Closing Disclosure arrives at least three business days before closing with the final numbers. Because the forms share a format, you can compare them line by line. The Consumer Financial Protection Bureau explains both on its Loan Estimate and Closing Disclosure pages.

Lender (origination) charges

These are fees the lender charges for making the loan. They may include an origination or underwriting fee and, if you choose, discount points. Points are an upfront payment to lower your interest rate. Paying points can make sense if you plan to keep the loan for a long time, but it raises your cash needed at closing. Ask lenders to quote with and without points so you can compare.

Third-party services

Lenders require certain services from other companies. Common examples:

• Appraisal: an independent estimate of the property’s value.
• Credit report fee: the cost of pulling your credit.
• Flood determination: checks whether the property is in a flood zone.
• Title services: a title search, the lender’s title insurance policy and settlement or escrow fees.
• Survey or pest inspection: required in some areas or by some loan types.

Your Loan Estimate shows which of these services you are allowed to shop for. Shopping can save money, particularly on title and settlement services in some markets.

Owner’s title insurance

The lender’s title policy protects the lender. An owner’s title policy protects you against certain covered problems with the title, such as unknown liens or ownership claims. It is optional in many places but commonly recommended. Who customarily pays for it, buyer or seller, depends on local practice and can be negotiated.

Government fees and taxes

Recording fees are charged by the county or city to record the deed and mortgage in public records. Many states and some cities also charge transfer taxes when property changes hands. Rates and who pays differ widely, so ask your agent or escrow officer what is typical locally.

Prepaids and escrow deposits

These are not fees in the usual sense but payments for costs you would have anyway:

• Prepaid interest from your closing date to the end of that month.
• Homeowners insurance premium, often the first year paid upfront.
• Initial escrow deposit: if your lender collects property taxes and insurance through an escrow account, it will usually require a starting cushion.

Because prepaid interest depends on the day of the month you close, your closing date affects how much cash you need.

Condo and HOA-related costs

Condo buyers often see extra items such as fees for HOA documents or a resale certificate, transfer fees charged by the association, and prorated HOA dues. Some associations collect a capital contribution from new owners. Ask for a list of these charges early, as they may not appear on your first Loan Estimate.

How to compare offers

When comparing lenders, look beyond the interest rate. Check the annual percentage rate (APR), the total of origination charges and points, and the “Total Closing Costs” figure. Make sure each Loan Estimate is for the same loan amount, loan type and lock period, otherwise the comparison is not apples to apples.

Ways you may be able to reduce closing costs

• Shop lenders and ask each for a Loan Estimate on the same day.
• Shop allowable services like title and settlement where permitted.
• Negotiate seller credits in your purchase contract, within the limits your loan program allows.
• Ask about lender credits, which reduce upfront costs in exchange for a slightly higher rate.
• Explore assistance programs. Many state housing finance agencies and some cities offer down payment or closing cost assistance for eligible buyers. HUD lists home buying resources, including programs by state.
• Choose your closing date thoughtfully to manage prepaid interest.

Reviewing the Closing Disclosure

When your Closing Disclosure arrives, check the loan amount, interest rate, monthly payment, and whether the loan has a prepayment penalty or balloon payment. Compare each fee to your Loan Estimate. Federal rules limit how much certain fees can increase between the two forms, with some fees allowed to change and others not. If something looks wrong, ask your lender right away; you have time built in to resolve it before closing.

Bringing your funds to closing

You will usually pay your remaining down payment and closing costs by wire transfer or cashier’s check. Wire fraud targeting homebuyers is a real risk. Confirm wiring instructions by phone using a number you have verified on your own, and be suspicious of any last-minute changes sent by email.

The bottom line

Closing costs are easier to handle when they are expected. Get Loan Estimates from several lenders, read every line, ask questions, and plan your savings to cover both the down payment and closing. With preparation, closing day becomes a formality rather than a surprise.

Frequently asked questions

Who usually pays closing costs, the buyer or the seller?

It depends on local custom and on what you negotiate. Buyers typically pay most loan-related costs, while some charges, such as transfer taxes or the owner’s title policy, may be paid by either side depending on where you live. Your purchase contract decides who pays what, so review it with your agent before signing.

Can closing costs be rolled into the loan?

Some loan programs allow certain costs to be financed or offset with lender credits in exchange for a higher interest rate. Whether this makes sense depends on how long you expect to keep the loan. Ask your lender to show you both options on a Loan Estimate so you can compare the total cost over time.

When should I start saving for closing costs?

As early as possible. Ask lenders for a Loan Estimate as soon as you are seriously shopping so you have a realistic figure, and keep that money separate from your down payment and emergency savings.