Guide I
Closing Costs
Closing costs are the fees and prepaid items that come due when a home purchase is completed, on top of the down payment. They often surprise first-time buyers, mostly because nobody explains where each number comes from. This guide walks through the usual lines on the sheet.
How big is the total?
In the United States, buyers’ closing costs are often quoted as roughly two to five per cent of the loan amount, but the real figure depends heavily on the state, the county, the lender and the price of the home. The only number that matters is the one on your own paperwork.
Two documents to keep side by side
- The Loan Estimate. For most mortgages, lenders must send this within three business days of receiving your application. It is a standard form, which makes it easy to compare offers.
- The Closing Disclosure. For most mortgages, this must reach you at least three business days before closing. It shows the final numbers. Compare it line by line with the Loan Estimate and ask about anything that has moved.
The usual lines
| Line | What it pays for |
|---|---|
| Origination and lender fees | The lender’s charges for processing and underwriting the loan |
| Points | Optional fees paid to lower the interest rate; one point is usually one per cent of the loan |
| Appraisal | An independent opinion of the home’s value, required by most lenders |
| Credit report | The cost of pulling your credit history |
| Title search and title insurance | Checking the public record for claims on the property, and insurance against problems the search missed |
| Settlement or closing fee | The cost of running the closing itself and handling the money |
| Recording fees and transfer taxes | Local government charges to file the deed and mortgage, and in some places a tax on the transfer |
| Survey and inspections | Where required, a boundary survey or pest inspection |
Prepaids: not fees, but money up front
Some lines are not fees at all. They are costs you would pay anyway, collected early:
- Prepaid interest from closing day to the end of that month.
- The first year of homeowners insurance, often paid before or at closing.
- Property tax and insurance reserves, an initial deposit into the account many lenders use to pay those bills for you.
- Prorated property taxes, split between buyer and seller by the day ownership changes.
Why the closing date changes the total. Prepaid interest runs from closing day to the end of the month, so a closing early in the month usually means more prepaid interest than one at the end. The monthly payment does not change; only the timing of the first bill does.
Cash to close
The figure you actually bring is the cash to close: the down payment plus closing costs, minus your earnest money deposit and any credits from the seller or lender. It appears near the top of the Closing Disclosure.
Questions worth asking
- Which of these costs can I shop for, and which are set by the lender?
- Is any line higher than it was on the Loan Estimate, and why?
- Are there seller credits, and where do they appear?
- How exactly should the money be sent, and how will I confirm the instructions?