Mortgage Closing Costs: What They Are and How Much to Budget

What closing costs are

Closing costs are the fees and prepaid amounts due when your mortgage closes. The CFPB lists common ones:

• Appraisal fees, for the lender's valuation of the home.
• Tax service provider fees.
• Title insurance, protecting against problems with the ownership record.
• Government taxes and recording fees.
• Prepaid expenses: property taxes, homeowners insurance and interest until your first payment is due.

Your Loan Estimate also shows origination charges, which include any discount points you choose to pay, and the initial deposit into your escrow account.

How much to budget

Freddie Mac's homebuyer site says you should typically be prepared to pay between 2% and 5% of the home purchase price in closing costs.

The range is wide because costs depend on your state and county (transfer taxes and title rules vary), the lender, the loan type, whether you pay points, and how many months of taxes and insurance must be prepaid. Your Loan Estimate is the best guide for a specific home and loan.

The two forms that protect you

Loan Estimate. The CFPB says the lender must give you a Loan Estimate within three business days of receiving your application. Every lender uses the same standard form, which makes comparing offers easier. It shows the loan terms, projected payments and estimated closing costs. It is not an approval; it shows what the lender expects to offer.

Closing Disclosure. A five-page form with the final terms and costs. The lender must give it to you at least three business days before closing. The CFPB says that window is there so you can compare the final figures with your Loan Estimate and ask questions before you sign.

Who pays what

The CFPB explains that buyers generally pay most closing costs, though contracts or state law can shift some to the seller. Two common arrangements:

• Seller credits. You negotiate a credit from the seller toward your costs. The CFPB notes that the seller usually requires a higher price to cover it, so you pay for it through the loan.
• Lender credits. The lender covers some costs in exchange for a higher interest rate, or by increasing the loan amount. These credits aren't free either.

Program rules can also apply. The VA, for example, does not limit credits for closing costs but caps seller's concessions at 4% of the home's reasonable value.

Ways to lower closing costs

• Get more than one Loan Estimate and compare section by section.
• Shop for services you are allowed to choose. The Loan Estimate shows which services you can shop for, such as title services in many areas.
• Ask about points and credits and decide whether paying less now or less later suits how long you'll keep the loan.
• Pick the closing date with care. Prepaid interest covers the days from closing to the end of the month, so the closing date changes the cash you need at closing, though not the overall cost of the loan.
• Look for assistance programs. State and local housing agencies run down payment and closing cost help for eligible buyers.

Keeping your papers

You will sign a stack of documents at closing and should keep them for as long as you own the home, and often longer for tax records. A simple fire-resistant document bag or an accordion file folder keeps the Closing Disclosure, deed, note and title policy together.

This guide is educational. Your Loan Estimate and Closing Disclosure show the costs for your loan.

Common questions

Are closing costs included in the down payment?

No. The down payment is your equity in the home; closing costs are fees and prepaid items on top of it.

Can closing costs go up after the Loan Estimate?

Some can and some can't. Federal rules limit increases in many lender and third-party fees, while items such as prepaid interest and escrow deposits can change with the closing date. Compare the Closing Disclosure with your Loan Estimate line by line.

Can I roll closing costs into the loan?

On a refinance, often yes, which means paying interest on them. On a purchase, you usually pay them in cash, though seller or lender credits can cover part.