Getting a mortgage isn’t free. Before you get those house keys, you’ll go to the closing table to sign loan documents and paperwork that transfer homeownership from the seller to you.
During your home purchase, third parties—such as your real estate attorney and your mortgage lender—have performed services. Closing costs include the fees these professionals (as well as others) charge for these services to finalize the real estate transaction and your home loan.
KEY TAKEAWAYS
- Closing costs are the fees and charges in excess of the purchase price of the property due at the closing of a real estate transaction.
- Both buyers and sellers may be subject to various closing costs.
- Closing costs may include fees related to the origination and underwriting of a mortgage loan, real estate commissions, taxes, and insurance premiums, as well as title and record filings.
- Closing costs must be disclosed in advance by law to buyers and sellers and agreed upon before a real estate deal can be completed.
Why Are Closing Costs Necessary?
A real estate transaction is a somewhat complex process with many players involved and numerous moving parts. Some states (and some loan products) require certain inspections beyond the basic inspection for which you directly pay a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees, addressed below.
Types of Fees With Closing Costs
All of the closing costs will be itemized on your loan estimate and closing disclosure. Here are some of the standard fees you can expect to see (in alphabetical order).
Application fee
A loan application fee may be charged by the lender to process your mortgage application. Ask the lender for details before applying for a mortgage.
Attorney fee
A fee charged by a real estate attorney to prepare and review home purchase agreements and contracts. Not all states require an attorney to handle a real estate transaction.
Closing fee
Also known as an escrow fee, this is paid to the party who handles the closing, which could be the title company, an escrow company, or an attorney, depending on state law.
Courier fee
If you’re signing paper documents, this fee helps expedite their transportation. If the closing is handled digitally, you might not pay this fee.
Credit report fee
This is a charge from a lender to pull your credit reports from the three main reporting bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.
Escrow deposit
Some lenders require you to deposit two months of property tax and mortgage insurance payments at closing into an escrow account.
FHA mortgage insurance premium
FHA loans require an upfront mortgage insurance premium (UPMIP) based off the loan amount to be paid at closing (or it can be rolled into your mortgage). There’s also an annual MIP payment paid monthly, and the cost is depending on your loan’s term and base amount.
Flood determination and monitoring fee
This is a fee charged to a certified flood inspector to determine whether the property is in a flood zone, which requires flood insurance (separate from your homeowners insurance policy). Part of the fee includes ongoing observation to monitor changes in the property’s flood status.
Homeowners association transfer fee
If you buy a condominium, townhouse, or property in a planned development, you must join that community’s homeowners association (HOA). This is the transfer fee that covers the costs of switching ownership, such as document costs. Whether the seller or buyer pays the fee may or may not be in the contract; you should check in advance.9
The seller should provide documentation showing HOA dues amounts and a copy of the HOA’s financial statements, notices, and minutes. Ask to see these documents, as well as the covenants, conditions, and restrictions (or CC&Rs), bylaws, and rules of the HOA before you buy the property to ensure it’s in good financial standing and a place you want to live.
Homeowners insurance
A lender usually requires prepayment of the first year’s homeowners insurance premium at closing.
Lender’s title insurance
This is an upfront, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that was not found in the title search.
Lead-based paint inspection
You can pay a certified inspector to determine if the property has hazardous, lead-based paint, which is possible in homes built before 1979.
Points
Points (or discount points) refer to an optional, upfront payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount. In a low-rate environment, this might not save you much money.
Owner’s title insurance
A title insurance policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts.
Origination fee
The origination charge covers the lender’s administrative costs to process your fee and is typically 1% of the loan amount.11 Some lenders do not charge origination fees, but if they don’t, they usually charge a higher interest rate to cover costs.
Pest inspection
This is a fee that covers the cost of a professional pest inspection for termites, dry rot, or other pest-related damage. Some states and some government-insured loans require the inspection.
Prepaid daily interest charges
A payment to cover any pro rata interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.9
Private mortgage insurance (PMI)
If your down payment is less than 20%, your lender could require PMI, and you may have to make the first month’s PMI payment at closing.12
Property appraisal fee
This is a required fee paid to a professional home appraisal company to assess the home’s fair market value used to determine your loan-to-value (LTV) ratio.
Property tax
At closing, expect to pay any pro rata property taxes that are due from the date of closing to the end of the tax year.1
Rate lock fee
This is a fee charged by the lender for guaranteeing you a certain interest rate (locking in) for a limited period of time, typically from the time you receive a pre-approval until closing. Recording fee
A recording fee may be charged by your local recording office, usually a city or county clerk's office, for the official processing of public land records.
Survey fee
This is a fee charged by a surveying company to check property lines and shared fences to confirm a property’s boundaries. It is generally between $300 and $500, though it can be higher if the property is large or has unusual boundaries.9
Tax monitoring and tax status research fees
This third-party fee is to keep tabs on your property tax payments and to notify your lender of any issues with your property tax payments, such as late or failed payments. The cost changes depending on where you live and the company your lender employs.
Title search fee
This is a fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensures that no outstanding ownership disputes or liens exist on the property.
Transfer tax
A transfer tax may be levied, depending on the jurisdiction, when the title is handed over from the seller to the buyer. The cost varies geographically.
Underwriting fees
Underwriting fees are charged by the lender for the work that goes into evaluating your application and approving your loan. Underwriting is the research process of verifying your financial, income, employment, and credit information for final loan approval.
VA funding fee
If you’re a VA borrower, this fee, charged as a percentage of the loan amount, helps offset the loan program’s costs to U.S. taxpayers. The amount of the funding fee depends on your military service classification and loan amount. It can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.9
How to Reduce Closing Costs
It might feel like you can’t afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. However, there are ways to negotiate these fees. Comparison shopping can be your ally in reducing closing costs, as well as finding competitive terms and rates
Shop around
This applies to lenders and third-party services, such as homeowners insurance policies and title companies. Many homebuyers don’t realize they can save significant money on closing costs if they compare fees from lender to lender. Also, you don’t have to use the title company, pest inspector, or homeowners insurance agent your lender suggests. Do your homework and you could save some serious cash on those fees.
Schedule the closing at the end of the month
A closing date near or at the end of the month helps cut down on prepaid daily interest charges. A lender can run this scenario for you to figure out how much you might save.
Roll closing costs into your mortgage
In some instances, lenders will offer to pay your closing costs or roll them into your loan. However, you’re not off the hook; lenders tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on those closing costs, as well as higher interest on your mortgage. Do this only as a last resort.
The Bottom Line
Closing costs are unavoidable when you buy a home. If you take proactive steps to shop around and closely analyze your loan estimate with your closing disclosure, you could save big bucks on those fees. As you start saving up for a down payment, set aside enough money for closing costs as well.
Remember that some areas of the country have higher closing costs than others. Above all, be your own best advocate. As you shop around, ask lenders to outline the fees they charge and try negotiating them down whenever possible.