Closing costs are the collection of fees and prepaid expenses you pay to finalize a mortgage, on top of your down payment. They typically run 2% to 5% of the loan amount, which is thousands of dollars that can surprise unprepared buyers. Knowing what these costs are and which you can influence helps you budget and negotiate.
Lender and origination fees
The lender charges fees for creating the loan, often grouped as origination or underwriting charges, and sometimes an application fee. Discount points, if you choose to buy them, also appear here as a percentage of the loan. These lender charges are among the most negotiable closing costs, especially when you have competing Loan Estimates. Always confirm whether a point is a discount point that lowers your rate or simply an origination fee.
Third-party services
Many closing costs pay outside parties for services required to complete the loan, such as the appraisal, credit report, title search, and title insurance. Some of these you can shop for, particularly title services and settlement agents, while others are set by the lender. Government recording fees and transfer taxes are fixed by your locality and cannot be shopped. The Loan Estimate labels which services you are allowed to shop, so use that to hunt for savings.
Prepaids and escrow deposits
Beyond fees for services, you prepay certain ongoing costs at closing, including prepaid interest from your closing date to the end of the month and the first homeowners insurance premium. Lenders also collect an initial escrow deposit to seed the account that will pay future taxes and insurance. These prepaids are not lender profit; they simply front-load expenses you would owe anyway. Because they depend on your closing date, timing your closing near month-end can slightly reduce prepaid interest.
Comparing and reducing what you pay
The Loan Estimate at application and the Closing Disclosure before closing let you verify costs and catch changes; you must receive the Closing Disclosure at least three business days before signing. Compare the two documents, since some fees are not allowed to increase and others have limited tolerance for change. You can reduce costs by shopping third-party services, negotiating lender fees, or asking the seller for a credit toward closing. Lender credits can also cover costs in exchange for a slightly higher rate if you are short on cash.
On a $300,000 loan, closing costs of 3% come to about $9,000. That might include $3,000 in lender fees, $1,500 for appraisal and title services, $1,000 in recording and transfer taxes, and roughly $3,500 in prepaid interest, insurance, and the initial escrow deposit. Shopping title services and negotiating lender fees could trim several hundred dollars off the total.
Key takeaways
- Closing costs typically total 2% to 5% of the loan amount, separate from the down payment.
- Lender origination fees are among the most negotiable, especially with competing quotes.
- You can shop some third-party services like title, but recording fees and transfer taxes are fixed.
- Prepaids and escrow deposits front-load taxes, insurance, and interest you would owe anyway.
- You must receive the Closing Disclosure at least three business days before closing to review costs.
Common mistakes
- Budgeting only for the down payment and being caught off guard by thousands in closing costs.
- Failing to compare the Loan Estimate against the Closing Disclosure for unexpected fee increases.
- Overlooking negotiable lender fees and shoppable services that could lower the bill.
FAQ
Can closing costs be rolled into the loan?
Sometimes. On a refinance you can often finance costs into the balance, and on a purchase you can request lender credits or seller concessions instead. Each option raises either your loan balance or your rate.
Who pays closing costs, the buyer or seller?
Buyers pay most closing costs, but sellers can agree to cover some as a concession, within program limits. What the seller pays is a point of negotiation in the purchase contract.