What is included in closing costs?

If you’re thinking about buying a home or refinancing an existing mortgage, you need to think about closing costs. It’s easy for first-time buyers to overlook the importance of closing costs with so much focus given to saving for the down payment. The truth is all real estate transactions come with closing costs—even if you’re refinancing or buying a home in cash. Every purchase of a home comes with fees, insurance, taxes, and administrative costs, no matter how you choose to pay. The same holds true for refinancing a mortgage—the home may not be new for you, but the mortgage is for the lender.

If you’re getting a mortgage, closing costs can range between 2%–5% of the loan amount. And generally speaking, the higher the amount of the loan, the lower the percentage of closing costs you’ll need to pay. This is because a number of closing costs are fixed.

Closing costs fall into 3 main categories: lender fees, third-party fees, and prepaid items (which may include escrow deposits if applicable). Collectively these 3 categories cover fees, insurance, taxes, and all the administrative costs needed to process the loan.

When you’re pre-approved for a mortgage, your lender is required to send you a Loan Estimate (LE) within 3 business days. The LE is a standardized document that breaks down the terms and costs associated with any loan. The closing costs on your LE give you a good idea of what you’ll need to pay. When you’re approved for the mortgage, the total costs you see on your final Closing Disclosure (CD) may be different from the costs you saw on your LE. This is because some fees are negotiable, some fees you can shop around for, and some fees—such as points or credits—are within your control.

There’s a lot to take in, so we’ll start with an overview of the 3 main categories, then we’ll dig into the specifics.

Lender points or credits

These are optional fees or credits that are within your control. They’re offered by your lender to help you reduce your overall interest rate for the term of the loan or to reduce (or eliminate) your upfront closing costs. If you’d like to reduce your interest rate for the long run, you can “buy” a lower rate by prepaying interest up front. Lenders call prepaid interest amounts “points” because they’re calculated as a percentage point of the total loan amount. 1 point is equal to 1% of the loan and will lower your interest rate by 0.25%. Or you can take lender “credits” to lower your closing costs, in exchange for a higher rate.

Our fixed-rate loan comparison calculator can help you decide if points or credits are right for you.

Third-party fees

On any mortgage application, there are a number of third-party fees that cover fixed charges, fees you can shop around for, and a few fees that may be negotiable. They are for services such as credit reports, home appraisals, and title searches. Whether you’re applying for a mortgage or buying property in cash, third-party fees are a necessary part of the home purchase process.

It’s possible to have some third-party fees waived (such as appraisal fees in specific circumstances) and you can shop around for others (title costs, for example). Some of these fees vary state by state (for instance, transfer taxes). And some third-party fees are fixed (like notary fees).

Prepaid items

There are two main kinds of prepaid items you’ll see on your LE or CD. Prepaid interest is charged on your loan from the day of closing through the end of the month before your first payment. The other prepaid items are fees which include prepaid property taxes, homeowners insurance, and escrow deposits.

How much you pay at closing also depends on whether you’re purchasing a new home or refinancing an existing mortgage. The key difference between the two situations is the down payment, which is only necessary when you purchase a home.

Buying: When do you pay closing costs and down payment?

If you’re a new homebuyer, you’ll pay your closing costs and the balance of your down payment on the day you sign your final loan documents.

The amount of the down payment is decided by you and your loan consultant. It’s a common misconception that down payments should be 20% of a home’s purchase price, for borrowers with great credit and a steady income, it’s possible to buy a home with as little as 3% down. Each lender has its own criteria for the array of mortgages they offer, and they’ll walk you through the minimum down payment needed for the loan(s) you qualify for. The down payment amount is typically based on the cost of the home, your assets, your credit history, and more.

Once a seller has accepted an offer on the home you love, the seller will usually need you to make an earnest money deposit. These funds are held in escrow during the loan application process. When the loan is approved and the closing documents are signed, the earnest money deposit will be applied to your down payment or closing costs.

Refinancing: When are closing costs due?

If you’re refinancing an existing mortgage, your closing costs are due at least one day before the loan is funded. (On your CD, the day of funding is referred to as the disbursement date.) This gives the lender enough time to disburse all the proceeds when the mortgage is funded. As your closing date approaches, your lender will tell you how and when to pay your closing costs.

You don't need to pay a down payment because you made your down payment when you initially purchased the home. Other differences include the cost of title fees—these are lower when you refinance because the owner of the property isn’t changing.

So, what are all of these itemized closing costs?

Excellent question. After all, Loan Estimates (LE) and Closing Disclosures (CD) are 3–5 pages long and they’re an alphabet soup of fees, taxes, and jargon that’s only familiar to people in the real estate industry. What’s more, there are different tax and insurance regulations from state to state, and some use different terms for the same types of charges. The kind and number of itemized fees you could see on a LE or CD can also vary dramatically. For this reason, it’s challenging to find a detailed list that explains what each and every one of these fees mean.

Page 2 of your LE or CD divides all your closing fees into two categories: Loan Costs, and Other Costs. Loan Costs are charges for services provided to the lender so that they can accurately process the loan. Other Costs include taxes, prepaid costs, initial escrow payments, and other itemized costs.

At the end of this article we explain the most common closing fees and charges. They’re broken down into the same sections as your LE or CD so you can easily follow along.

• If there’s a fee on your loan estimate that’s not listed below, your loan consultant or processing expert will be able to explain it for you.
• If you need more information about the itemized fees on your Closing Disclosure, your closing expert can help you.

Better Mortgage is committed to eliminating unnecessary fees wherever possible and not passing on costs to our customers. You’ll see how our Loan Estimates compare when you start the process.

How do I know what my monthly mortgage payments will be?

Finding the loan that’s right for you is a lot easier when you know all the closing costs involved.

On the first page of your LE or CD, in the section titled Projected Payments, you’ll see your estimated total monthly payment. This calculation covers your principal and interest, private mortgage insurance (if you have it), homeowner’s insurance, and estimated escrow fees. (Escrow fees can increase over time, which is why they’re listed as “estimated” on closing disclosures.)

In the estimated taxes, insurance, and assessments section, it will show you the amount you’ll need to pay each month on taxes, insurance, and assessments (including homeowners association fees). If you’re buying a home in a building or community with no homeowners association (HOA) or if you’re refinancing, then the amount listed on your CD under estimated total monthly payment is what your monthly mortgage payment will be.

Generally speaking, HOA fees are not included in the escrow portion of your monthly mortgage payment. So, if you’re planning to buy into a community with an HOA, add the HOA fees to your estimated total monthly payment for an accurate total monthly mortgage payment.

See how Better Mortgage can help you save

Before you close on a loan, make a point to shop around for homeowners insurance, and investigate whether buying points would be a good financial decision for you. When you lower the cost of your homeowners insurance, you’ll reduce the monthly amount you’ll need to pay into escrow.

To get an idea of what your monthly mortgage payment will look like if you buy points or accept credits, take a look at the Better Fixed-rate loan comparison calculator. It will help you see how much money you stand to spend or save.

Whether you are purchasing or refinancing, we will help you choose the best mortgage for you by seeing how the cost of a home changes based on your loan costs.

Get started to find out your estimated closing costs in as little as 3 minutes and discover how Better Mortgage can help you save on your homebuying or refinance journey.

The most common closing costs and fees explained

Grab a coffee and take a seat. Let’s take a deep dive into itemized closing costs.

Loan Costs

A. Origination charges

Application fee, origination fee, processing fee, verification fee, rate lock fee, underwriting fee, administration fee, broker fee, commission.

In essence, all of these fees serve the same purpose: to make the lender money by processing your mortgage application. In many cases these fees are negotiable. If a fee seems unusually high, don’t hesitate to ask for a discount.

Mortgage points (or discount fee)

If you decide to buy points, with this one-off fee you can lower your monthly mortgage payment.

B. Services borrower did not shop for

Don’t let the title of this section throw you off—as a borrower, you’re actually unable to shop for these fees. Although you don’t have any wiggle room with these fees, understanding them is important to know where your money is going, so you can budget accordingly. These fees are not paid to the lender to complete the sale of the property. Depending on the lender, these fees may cover your things like the credit report, appraisal, and land survey. Here's a list of the most common charges you’re likely to see here.

Appraisal fee

This covers the cost of having a licensed professional provide an unbiased estimate of your property’s fair market value. It’s something that all lenders require to ensure that they’re not lending you more money than what your property is actually worth. In some circumstances this fee can be waived.

Credit report

When you apply for a mortgage your lender performs a hard credit check (also known as a credit inquiry or credit pull) to help determine your eligibility for the loan.

Flood determination
This document (also known as a flood certification or flood certification and determination) is used to certify Federal Emergency Management Association (FEMA) flood maps.

HOA certification fee

If you’re buying in a building or community with a homeowners association you’ll be charged this fee. It’s so the HOA can provide information on the property to your lender.

Third-party subordination fee

A subordination fee may appear on your CD if you have a second mortgage on your property, such as a home equity line of credit (HELOC). When you refinance the original mortgage, the refinance lender may require the lender that holds the second mortgage to commit to a subordination agreement. That means that if you default on your mortgage and your property is sold, your refinance mortgage gets paid (with the proceeds from the home sale) before the second mortgage is paid.

Title-closing protection letter

This is a contract between the lender and the title insurance underwriter. In this contract, the underwriter agrees to compensate the lender for actual losses caused by specific displays of misconduct by the closing agent.

VA funding fee

This fee is only for VA borrowers. It helps to offset the loan program costs to US taxpayers. It can be paid at closing or rolled into your mortgage. Some military members are exempt from paying this fee.

C. Services borrower did shop for

Title closing fee

This is paid to the title company, escrow company, or attorney for completing the closing costs of the real estate transaction. This fee sometimes goes by other names such as title-settlement fee or escrow fee.

Pest inspection fee

This is performed by a certified pest inspector to determine if a property has an active or previous pest infestation.

Termite inspection

A professional inspector will examine the property to identify if there are any issues with termites or other wood-boring insects such as powder-post beetles.

Title-lender’s title policy

Your lender will get this insurance to protect themselves against any problems with the title to your property. For example, if someone sues the lender saying they have a claim against the home, the lender is protected. In most cases Lender’s title insurance is required to get a home loan. This is one of those fees that some states will allow you to shop around for, but unfortunately not all states have this flexibility.

Title-search

This search confirms a property’s legal ownership by examining public records. The search also reveals what claims or liens are on the property. Financial claims such as liens affect how a property can be sold or transferred. Some liens can prevent sales from going through so this is an important search for all parties involved.

D. Total loan costs (borrower+paid)

This is a subtotal of sections A+B+C. These costs that go towards the loan approval itself.

Other Costs

E. Taxes and other government fees

In this section there are a lot of fees and taxes that are essentially the same, they’re just given different names based on the state, county or city collecting the tax. Kind of like how sweet, carbonated beverages are called soda, pop, or coke depending on where you’re from in the US.

Recording fees
These are government fees paid to your local recording office. Sadly, it has nothing to do with making music. The fees cover the costs to create an official record of the deed transfer from the seller to the buyer. Sometimes it’s referred to as a deed recording fee.

Transfer tax

Some states and counties charge this tax when a title is transferred from the seller to the buyer. (In many areas around the country, it’s customary for the seller to pay transfer taxes. Ask your real estate agent to review your purchase contract to see if this is a fee you’ll need to pay.) Sometimes you’ll see this tax listed as a county deed stamp or a stamp tax. Tax fact: When a county collects the transfer tax for the state, a stamp goes on the deed. Hence the phrase ‘stamp tax’. Florida and Pennsylvania use the term documentary stamp tax. Ohio calls it a real property conveyance fee. And Rhode island calls it a real estate conveyance tax.

County deed stamps

Yes, you guessed it: This is another name for transfer taxes and recording fees.

Revenue stamps

Yet another name for transfer taxes/deed stamps/recording fees.

F. Prepaids

Homeowners insurance premium

In many cases your lender will require homeowners insurance to be prepaid so that the property is insured against damage from the day the loan begins.

Mortgage insurance premium

If your down payment was less than 20% your lender will require Private Mortgage Insurance (PMI). PMI protects the lender if you stop making payments on your loan. Although mortgage insurance is a line item in the Prepaids section of your LE/CD, currently there is no prepaid payment required as part of your closing costs. This may change in the future.

Prepaid interest

Your mortgage starts incurring interest from the day you close. Just as landlords require their tenants to pay rent in advance, lenders require borrowers to pay interest (and of course principal payments) in advance, too.

Property taxes

Mortgage lenders or servicers collect your property taxes in advance (in an escrow account) to ensure these bills are paid on time. If you fall behind on your property tax payments a lien could be placed on your property, and neither you or your lender want that to happen.

G. Initial escrow payment at closing

Homeowners insurance

This is a form of property insurance to cover any losses or damages that could happen to a borrowers house and belongings in the home.

Mortgage insurance

If your down payment is less than 20% your lender may require you to get Private Mortgage Insurance (PMI).

Fun fact: Even though mortgage insurance is a line item in this section, there is no fee for this at closing. PMI is typically paid monthly as part of your ongoing mortgage payments.

Property taxes

This is a tax homeowners need to pay for services provided by the city, county or applicable jurisdiction. These include water and sewer improvements, law enforcement, fire protection, educational services such as schools and libraries, roads, and other services that benefit the community.

H. Other

Here you’ll find a mixed bag of fees that are tailored to your unique situation. It’s common to see a variety of fees here that the seller is responsible for.

HOA capital contribution

This is like an initial fee or joining fee for homebuyers who buy into a community with a homeowners association. Usually these fees are used to fund capital improvements and repairs in the community.

HOA processing fee

Also known as an HOA transfer fee, this charge is used to cover all the costs the HOA will incur when they transfer their ownership records from the seller to the buyer.

Real estate broker commission

If you’re buying a home this fee is typically paid by the seller. The amount is usually based on a percentage of a home’s selling price.

Home warranty fee

This may be paid by the seller to protect buyers from unexpected repair or replacement costs that could arise if covered items such as major kitchen appliances, electrical, plumbing, heating or cooling systems fail due to normal wear and tear.

Title-owner’s title insurance (optional)

These are fees paid to check historical records to make sure the property can be legally transferred to you. The lenders title insurance protects the lender (up to the loan amount). This optional insurance protects your financial investment in the property.

Closing Costs FAQs

What Are Closing Costs?

Closing costs are the fees and expenses paid by both buyers and sellers during the real estate transaction process. These costs are over and above the price of the property and can include fees for loan origination, appraisals, title insurance, and more.

Who Pays for Closing Costs?

Both buyers and sellers pay closing costs, but the specific costs each party is responsible for can vary by transaction. Buyers typically pay for loan-related fees, appraisal fees, and title insurance, while sellers might cover real estate agent commissions and transfer taxes.

Can Closing Costs Be Included in the Loan?

Yes, in some cases, closing costs can be rolled into the loan amount, allowing the buyer to finance them along with the purchase price of the home. However, this means you'll pay interest on these costs over the life of the loan.

How Can I Estimate My Closing Costs?

Your lender will provide a Loan Estimate (LE) shortly after you apply for a mortgage, which includes an estimated amount of your closing costs. Before closing, you'll receive a Closing Disclosure, which lists the final closing costs.

Are Closing Costs Negotiable?

Yes, some closing costs are negotiable. You can shop around and compare fees from different lenders or service providers. Additionally, you can negotiate with the seller to cover some of your closing costs.

How Much Are Closing Costs Typically?

Closing costs typically range from 2% to 5% of the home's purchase price. The exact amount can vary significantly based on the location of the property, the type of loan, and the services required.

What's Included in Closing Costs?

Closing costs can include a variety of fees, such as:

• Loan origination fees
• Appraisal fees
• Title searches and title insurance
• Survey fees
• Home inspection fees
• Property taxes
• Homeowners insurance
• Private Mortgage Insurance (PMI), if applicable

Can I Lower My Closing Costs?

There are several strategies to lower your closing costs:

• Compare costs from different lenders and service providers
• Negotiate lender fees
• Ask the seller to contribute towards your closing costs.
• Look for lender credits or rebates

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