When you budget for a home, the down payment is only part of the picture. Closing costs are the fees and expenses you pay at closing, and they can add up. Understanding closing costs when buying a house helps you plan your cash and avoid surprises.
The short answer: closing costs typically include lender fees, an appraisal, title services, recording fees, prepaid expenses and escrow deposits. The total varies by loan amount, location and lender. Ask your loan officer for an estimate early in the process.
What are closing costs?
Closing costs are the fees and expenses paid when you finalize your mortgage and take ownership of the home. They are separate from your down payment and are usually paid at closing, the day you sign your final documents.
Closing costs are often a percentage of the loan amount, but the exact total depends on your loan, your location and the services required.
Common closing costs
Lender fees
Lenders may charge fees for processing, underwriting and originating your loan. These can include:
- An application or origination fee
- An underwriting fee
- A credit report fee
Appraisal fee
Your lender usually orders an appraisal to confirm the home's value supports the loan amount. You typically pay for the appraisal at or before closing.
Title services
Title services protect your ownership of the property. They can include:
- A title search to confirm the seller can transfer the property
- Title insurance, which protects you and the lender against title defects
Recording fees
Your local government charges a fee to record the deed and mortgage in public records.
Prepaid expenses
Some costs are paid in advance at closing, such as:
- Homeowners insurance premiums
- Property taxes (often placed in an escrow account)
- Prepaid interest on your loan
Escrow deposits
Your lender may set up an escrow account to pay your property taxes and insurance. At closing, you may fund that account with a few months of reserves.
How much are closing costs?
The total varies widely based on your loan amount, your location and the services required. A common estimate is that closing costs are a percentage of the loan amount, but the exact number depends on your situation.
Ask your lender for a Loan Estimate early in the process. The Loan Estimate shows your estimated closing costs, interest rate and monthly payment, so you can compare offers and plan your cash.
How to prepare for closing costs
- Ask for a Loan Estimate as soon as you apply.
- Review the estimate and ask your lender to explain any fee you do not understand.
- Save extra cash beyond your down payment to cover closing costs.
- Compare offers from more than one lender when possible.
- Confirm your cash to close a few days before closing.
Can closing costs be financed?
Some costs can sometimes be paid by the seller or financed into the loan, depending on the program, the contract and the lender. In a buyer's market, you may be able to negotiate for the seller to pay part of your closing costs. This is not guaranteed and depends on your purchase agreement.
Frequently asked questions
Are closing costs the same as the down payment? No. Closing costs are separate fees and expenses paid at closing, in addition to your down payment.
Can the seller pay my closing costs? Sometimes. Depending on the contract and the loan program, you may negotiate for the seller to pay part of your closing costs. It is not guaranteed.
When do I find out my exact closing costs? Your lender gives you a Loan Estimate early in the process and a Closing Disclosure a few days before closing with the final numbers.
Do I pay closing costs in cash? Closing costs are usually paid at closing, often by wire transfer or cashier's check. Ask your lender how to prepare.
Ready to plan your cash to close?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Closing costs vary by loan, location and lender. Speak with a qualified professional about your individual situation.
