Closing Costs Explained: What You Pay and How to Lower It

Closing costs are the fees and prepaid items due when your loan funds and the sale completes. They surprise many first-time buyers because they come on top of the down payment. A common planning range is about 2% to 5% of the purchase price, so on a $400,000 home that is roughly $8,000 to $20,000. Your actual costs depend on the lender, the loan type, the state and the property.

What closing costs include

Lender charges

• Origination, underwriting and processing fees.
• Discount points, if you choose to buy down the rate. See mortgage points.

Third-party services

• Appraisal, credit report, and flood determination.
• Title search, title insurance and settlement or escrow fees.
• Recording fees and, in some places, transfer taxes.
• A home inspection, usually paid earlier and separately.

Prepaid items and escrow

• Homeowners insurance for the first year.
• Property taxes and mortgage interest prepaid through the closing date.
• An initial deposit to your escrow account.

Two documents that matter

When you apply, your lender must give you a Loan Estimate within three business days. It is a standardized form that shows the rate, the monthly payment and an itemized list of costs, so you can compare lenders line by line. Before closing, you receive a Closing Disclosure with the final numbers, and you are entitled to it at least three business days before you close. Compare the two. Some fees are not allowed to rise, and others have limits.

Ways to lower your closing costs

1. Shop lenders. Request Loan Estimates from at least three on the same day and compare the total of lender charges, not just the rate.
2. Shop the services you can choose. The Loan Estimate separates services you cannot shop for from those you can, such as title services.
3. Ask for seller credits. In many markets a seller will agree to pay a share of the buyer’s closing costs, and loan programs limit how much.
4. Consider a lender credit. Accepting a slightly higher rate can reduce upfront costs, which makes sense if you will not keep the loan long.
5. Close late in the month. Prepaid interest is charged from closing day to month-end, so a later closing date means less prepaid interest, though your first payment date moves too.

Can you roll them into the loan?

On a refinance this is common. On a purchase, the loan is based on the price and a lender limits borrowing to a percentage of value, so closing costs are usually paid in cash, from seller credits, or from a lender credit.

How much cash to save

Add your down payment, closing costs and a cushion for moving and early repairs. The closing costs calculator shows the range for your price and your total cash to close, and the down payment calculator shows how long it takes to save.

Common questions

When do I pay closing costs?

At or just before closing. You bring a cashier’s check or send a wire for the cash to close shown on your Closing Disclosure, which includes your down payment and closing costs, minus any earnest money you already paid. Always confirm wiring instructions by phone with a number you trust, because wire fraud targets home buyers.

Are closing costs tax deductible?

Most are not, though some items such as discount points and property taxes paid at closing may be deductible depending on your situation. Ask a tax professional, since the rules and your eligibility to itemize vary.

Why did my closing costs change from the Loan Estimate?

Some charges are not allowed to increase at all, some can rise only a limited amount, and others can change if the services or circumstances change. Compare your Closing Disclosure with the Loan Estimate and ask the lender to explain any difference you do not understand before you sign.

Key takeaways

• Plan on roughly 2% to 5% of the purchase price in closing costs, then confirm with real estimates.
• Compare Loan Estimates from several lenders on the same day.
• Seller credits, lender credits and a later closing date can reduce what you pay in cash.