Closing costs are the charges you pay to get your mortgage and complete the purchase, on top of the down payment. They catch many first-time buyers off guard because they arrive as a long list of unfamiliar line items. The good news is that the list follows a pattern. Once you know the groups, you can read any Loan Estimate quickly and see where there is room to save.
Group 1: What the lender charges
Lenders charge for originating, or making, your loan. The labels vary: origination fee, application fee, underwriting fee, processing fee, administrative fee. Do not get lost in the names. The Consumer Financial Protection Bureau’s advice is that the total amount is what matters, because one lender may split a cost into three lines while another bundles it into one.
Points
Points are an optional upfront charge that lowers your interest rate. They are calculated as a percentage of the loan amount. Whether they pay off depends on how long you keep the loan: the longer you stay, the more months of lower payments you get to recover the cost. If you might sell or refinance in a few years, paying points is often harder to justify.
Group 2: Third-party services
These are services the loan requires but someone other than the lender provides, such as the appraisal and title insurance. For some of them, you are allowed to choose your own provider. Buyers who shop for those services often save money, and the time to research providers is before you find a home, because things move fast once an offer is accepted.
Group 3: Government fees
Local governments may charge fees connected with recording the deed and mortgage or with the transfer itself. They generally do not vary by lender, so they are not something to shop, but they belong in your budget.
Group 4: Prepaid expenses and deposits
Some money at closing is not a fee at all but an advance on costs you would pay anyway. Typically you pay the interest on your loan from the closing day to the end of that month, the first year of homeowners insurance, and initial deposits into an escrow account that the lender uses to pay future property taxes and insurance. Closing near the end of a month reduces prepaid interest, but it does not change your total cost of borrowing much.
Tip: Prepaids and escrow deposits can be a large share of the cash you bring. They are easy to forget when you compare lenders, because they depend more on your taxes and insurance than on the lender.
Group 5: Costs of buying that the loan does not require
Some expenses are part of buying a home even though the lender does not require them: the home inspection, an owner’s title insurance policy, and real estate agent fees, depending on your agreement and your contract. Ask early who pays what. Our guide to The Home Inspection: A First-Time Buyer’s Guide explains why the inspection is worth every dollar.
Where to find all of this
After you apply, the lender must send a Loan Estimate within three business days. All lenders use the same standard form, so you can lay two or three side by side. Look at the total closing costs and the cash to close, and then at the sections that the lender controls. At least three business days before closing you will receive the Closing Disclosure with the final numbers. Compare it to the Loan Estimate line by line and ask about every change.
Ways to lower the cash you need
- Compare lenders on the same day, so rate and fees are measured against the same market.
- Shop the services you are allowed to shop, such as title and settlement services.
- Decide on points deliberately, based on how long you expect to keep the loan.
- Negotiate seller-paid costs in your offer; your purchase contract decides whether the seller pays some costs.
- Look for down payment and closing cost assistance through state or local housing programs.
A quick reading order for your Loan Estimate
Page 1 shows the loan terms, the projected monthly payment including any mortgage insurance, and the estimated cash to close. Page 2 breaks closing costs into the lender’s charges, services you cannot shop for, services you can shop for, taxes and government fees, and prepaids. Page 3 adds comparisons such as the Total Interest Percentage, which tells you how much interest you would pay over the life of the loan relative to the amount borrowed. Read page 1 first, then page 2, then compare page 3 between offers.
The bottom line
Closing costs are not a single fee you have to accept. Some are fixed, some are advances on bills you would pay anyway, and some can be shopped or negotiated. Knowing which is which is the difference between being surprised at the closing table and arriving with the right amount in the bank. When you are ready to compare loans, start with Getting Pre-Approved for a Mortgage: What It Means and How to Do It Well.