Closing Costs Explained
Closing costs are the fees and expenses paid at the closing table to finalize a mortgage, typically ranging in complexity based on loan type and property location. Understanding each line item helps you budget accurately and avoid surprises on closing day.
What Are Closing Costs?
Closing costs are the fees, taxes, and expenses you pay when you finalize your mortgage and take ownership of the property. These costs go to the lender, title company, government agencies, inspectors, appraisers, and sometimes the real estate attorney or title insurance company. They are separate from your down payment and are due at the closing table. The total amount varies based on the loan type, the property value, and your location, but they typically fall within a range based on what your lender and other service providers charge.
On the closing day, you will review a document called the Closing Disclosure, which lists every fee and cost. This document must be provided at least three business days before closing, giving you time to review and ask questions. Understanding each line item helps you avoid surprises and ensures you know where your money is going.
Lender Fees
Your mortgage lender charges several fees to process, underwrite, and close your loan. These typically include an origination fee or underwriting fee, which covers the cost of processing your application and evaluating your financial situation. Some lenders also charge a processing fee to gather documents, verify information, and coordinate the closing. Discount points are optional charges you can pay upfront to lower your interest rate over time.
Other lender charges may include a loan document preparation fee, which covers the creation of your promissory note and mortgage document. A few lenders charge a compliance or review fee to ensure all regulations are met. All of these fees should be disclosed upfront and listed on your initial loan estimate. Before committing to a lender, ask which fees are fixed and which may vary, and whether any can be negotiated or waived.
Title, Insurance, and Legal Costs
Title fees are some of the most important costs in a closing. A title company or attorney performs a title search to ensure the seller truly owns the property and there are no liens, judgments, or other claims against it. This search costs money, and the title company or attorney also charges a fee to review the results and coordinate the closing. These services protect you by confirming that the property will be transferred to you free and clear.
Title Insurance
Title insurance protects you if someone later claims to own part of the property or if an old lien surfaces. There are two types: owner's title insurance, which protects your equity, and lender's title insurance, which protects the lender. The lender's policy is usually required and is a one-time premium paid at closing. Some states require an attorney to be present at closing, which adds an attorney fee to your costs.
Appraisal and Inspection Fees
Before your lender approves your loan, they require an appraisal to confirm that the property is worth at least what you are borrowing. The appraiser inspects the home, compares it to similar properties in the area, and provides a written report. This fee is paid at or before closing and covers the appraiser's time and expertise. In some cases, your lender may order a second appraisal or review, which would add another charge.
A home inspection is different from an appraisal and is typically ordered before you go into contract. However, some lenders require an inspection report as part of their underwriting process, and you may need to pay for it if you have not already. Pest inspections, roof inspections, and other specialized inspections may also be required depending on the property condition or loan type. These fees are generally smaller than the appraisal but add up over time.
Government and Recording Fees
When you take out a mortgage, the lender records a lien against the property to protect their interest. Recording fees are charged by the county or local government to file your mortgage document in the public record. The amount varies by location but is usually a modest charge based on the number of pages or the loan amount. You will also pay property transfer taxes or stamps in some states and counties, which are calculated as a percentage of the purchase price.
Depending on your location, you may also pay a property tax proration, which splits the year's property taxes between you and the seller based on the closing date. Some areas charge HOA transfer fees if the property is in a homeowners association. Each of these charges is determined by local law and cannot be avoided, but the exact amount depends on where the property is located and the terms of the sale.
Prepaid Items and Escrow
At closing, you may be required to prepay certain costs that will be held in an escrow account by your lender. Homeowners insurance is typically prepaid for the first year at closing and must be in place before you take ownership. Your lender will hold the insurance policy and ensure the premium is paid. Property taxes may also be prepaid for the first year or a portion of it, depending on your lender's escrow requirements and local tax collection dates.
In addition, your lender will collect funds to establish an escrow cushion, which is extra money held to cover months when tax or insurance payments are higher than expected. This protects the lender by ensuring funds are always available to pay these obligations. The total prepaid amount can be significant and should be outlined clearly on your Closing Disclosure so you can budget accordingly.
Other Costs You May Encounter
Depending on your loan type and situation, other fees may apply. FHA loans require an upfront mortgage insurance premium, which protects the lender if you default. VA loans may include a funding fee unless you are exempt due to service-related disability. Jumbo loans and some other specialized loan programs may have different fee structures or higher fees than conventional loans.
Credit report fees may be charged if the lender orders a fresh credit report before closing. A wire transfer fee may apply if funds are transferred electronically. Some lenders charge a final walkthrough fee or a lock-in fee to protect your interest rate. Ask your lender for a complete list of all possible fees upfront so there are no surprises.
Reviewing Your Closing Disclosure
The Closing Disclosure is a detailed summary of all costs and is required by federal law to be given to you at least three business days before closing. Review it carefully and compare it to your loan estimate, which was provided at the beginning of the process. Some fees may have changed, and you have the right to ask why. When reviewing your document, check the following:
- Compare the Closing Disclosure to your loan estimate
- Look for errors or duplicate charges
- Identify any fees you do not recognize
- Verify loan terms and numbers
- Ask about any significant changes from your estimate
Make a list of questions and contact your lender or closing agent before closing day. If a fee seems unusually high, ask for an explanation or request that it be removed or reduced. Do not wait until closing to review these documents. If you have questions about closing costs as you prepare, The Huntress Home Loan Pro can help you understand your options. Contact Theresa Rolen at (913) 705-0049 or Theresa@SummitLendingUSA.com to review your Closing Disclosure and ensure you are ready for closing day.
Theresa Rolen | The Huntress Home Loan Pro
(913) 705-0049
Theresa@SummitLendingUSA.com
NMLS #2249004 | Summit Lending NMLS #1850081
Equal Housing Opportunity
*Mortgage information is provided for educational purposes only and is not a commitment to lend or an advertisement of a specific interest rate. Seller concessions may apply in some transactions. Consult with your lender regarding your individual situation.
Common questions
What is included in closing costs?
Closing costs include lender fees (origination, underwriting, processing), title fees and insurance, appraisal and inspection costs, government recording fees and property transfer taxes, prepaid homeowners insurance and property taxes, and escrow cushion funds. The exact costs depend on your loan type, property location, and lender.
Who pays closing costs, the buyer or seller?
Buyers typically pay most closing costs, but the sales contract can specify that the seller pays some or all of them. This is negotiable in the purchase agreement. Some loan programs may have limitations on how much sellers can contribute toward buyer costs.
Can closing costs be waived or reduced?
Government fees and recording fees cannot be avoided, but some lender fees may be negotiable or waived depending on your loan type and circumstances. You can ask the seller to cover certain costs in your purchase agreement. Review your loan estimate and ask your lender which fees are fixed and which might be flexible.
When should I review my closing costs?
Review your loan estimate when you receive it within three days of applying and ask questions about any fees you do not understand. Request your Closing Disclosure at least three days before closing and compare it carefully to your estimate. Do not sign at closing until you understand and agree with every charge.
Do closing costs differ by loan type?
Yes. FHA loans include an upfront mortgage insurance premium. VA loans may include a funding fee. Jumbo loans and specialized programs may have different fee structures or higher charges. Refinances typically cost less than purchase closings because they involve fewer services and no title insurance or property transfer taxes.