The settlement or closing process on a real estate transaction can seem complicated, even to experienced homebuyers. There’s a ton of legal jargon and paperwork, and a ton of fees. That’s why we’ve created a plain english guide to answer your questions about closing costs. It’s designed to help make the closing services and process easier by helping you to be and arrive prepared.
What are mortgage closing costs?
They’re all of the expenses needed to originate the mortgage and close the house sale transferring the property from the seller(s) to the buyer(s). These are out-of-pocket expenses and you’ll need to have cash available for some or all of them even if your lender doesn’t require a down payment, like with a VA loan or USDA mortgage. These are called settlement costs.
What is included in closing costs?
They’re made up fees, charges, and taxes related to the title, inspections, loan origination, insurance and any other charges incurred during the homebuying process.
Typical closing fees include:
- Mortgage origination and application fees, PMI, broker fees, underwriting and points
- Title search and title insurance
- Attorney fees
- Recording fees and transfer fees
- Property taxes
- Commissions to the real estate agents
- Flood certification
- Inspections – home, termite, flood, and any others as required by your specific type of loan
- Wire transfer fee
- Settlement fee
- HOA or condo association dues and transfer fees
The exact charges will vary based on your location, the contract, and what type of loan you have. For more information about the different fees, check out Closing Costs Explained.
How are closing costs determined?
They’re determined by each line item charge added up together. Some are fixed costs and some are variable. It’s typical to pay between 2-5% of the home’s purchase price for closing fees, and that number doesn’t include your down payment. When you apply for a mortgage, your lender is required to send you a Loan Estimate that lists the anticipated items needed to close and their approximate cost so you’ll know exactly what you’re paying for.
Who pays the closing costs?
The buyer is usually responsible for most of them, but you can ask others to pay. In some areas or in a buyer’s market, sellers might offer to pay for some or all of the fees, and lenders sometimes have programs that cover closing costs. Your real estate professional and title agent can help you negotiate who will pay for which costs to reduce your out-of-pocket expenses at the closing table.
Do sellers pay any of them?
Real estate commissions to the seller’s and buyer’s agents are paid by the seller, which is usually a total of 6% purchase price. Depending on how the deal is structured, they also might have to reimburse you for prorated taxes and other annual fees for the months when they lived in the home. For example, if you close on September 30, the seller may pay 75% of the annual taxes, because they lived in the home for 9 out of 12 months.
You can ask sellers to pay for other settlement fees and in many areas, this is a common practice. When you are making your offer or are negotiating, discuss closing costs with your real estate agent so they can write it into the contract. For example, you might ask the sellers to pay for a termite inspection. They usually won’t pay for any specific fees related to your loan, such as application fees or the appraisal. You can also ask for a closing credit, which is a percentage that will be applied to the total closing costs.
Once you’re sitting at the closing table, you won’t be able to ask for any more concessions or for the sellers to pay any extra fees.
How much will my closing costs be?
Your Loan Estimate will give you a good idea of what your costs will likely be, but you’ll know for sure when you receive your Closing Disclosure. You can find the exact amount you need to bring at the bottom of page 1 and 3 (on many closing service agreements) of the Closing Disclosure on the line “Cash to Close From Borrower”. This gives you time to compare it to the Loan Estimate you received when applying for your mortgage and to question anything that doesn’t match before you get to the closing table.
Take a look at our Closing Cost Calculator to help you plan your home purchase and estimate your closing costs.
Do the closing costs include my down payment?
Closing costs and your down payment are two separate things.
- Closing costs are the expenses related to your new mortgage and transferring the title to you from the sellers, and the fees will be distributed to the third parties who helped with the transaction by the title agent or escrow officer after closing.
- Down payments are determined by your lender and the type of loan you’re getting and is usually a percentage of the total home price. Your down payment can affect your closing costs, for example if you put more than 20% down you probably won’t be required to purchase PMI (private mortgage insurance).
When will I know how much I need to bring to closing?
You should receive a 5-page Closing Disclosure at least 3 business days before your closing that will list all of the settlement fees and the exact dollar amount you need to bring to closing, which might also include your down payment in addition to the settlement fees.
Can closing costs change before or at closing?
Yes. The Loan Estimate is just that, an estimate. The actual costs might be different and can be affected by changes in circumstance, insurance premium changes, and charges from third parties, like inspectors.
Can I negotiate closing costs?
Yes. You can shop around for some of your closing costs and services. The items you can shop for are clearly marked on page 2 section C of your Loan Estimate. Generally you can choose your own third party service providers like home inspections, home insurance, and you can even choose your own title insurance and closing services.
Can closing costs be added into my loan?
Some lenders will allow you to add your closing costs to the total mortgage principal, but this comes at a high cost to you, the borrower. You’ll have to pay interest on those fees until the mortgage is paid off, which could be 15-30 years. This added interest can make for a very expensive closing!
There is also a loan offering called a “no-closing-cost mortgage” but don’t be fooled. You’re still paying for the settlement costs, it’s just hidden by higher interest rates. Make sure you do the math and know how much you’ll really be paying over the life of the loan before deciding whether rolling them into your mortgage.
What happens to my earnest money at closing?
When your offer was accepted, you probably wrote an earnest money check as a good faith deposit. This money is held in the escrow account throughout the closing process and will be deducted from your total. It will be listed as a “Deposit” within the closing disclosure document you receive.
How do I pay for closing costs?
Paying closing costs is easy. You just send the amount listed as “cash due from borrower” by wire transfer at least a day ahead of your closing. Some title companies accept cashier’s check, but you’ll need to make sure beforehand. Not sending the funds or bringing them in the wrong form will delay your closing. Do not bring a personal check.
Can I pay closing costs with cash or a credit card?
No. For security purposes, both for you and for the companies involved, cash and credit cards are not accepted to pay for closing costs as a best practice.
Are closing costs tax deductible?
Some of them may be tax deductible, depending on where you live, your overall household income, and whether this is your primary residence or an investment property. Some might be deductible for a different tax year. Prepaid mortgage interest, for example, may be able to be deducted in the years it applies to. Real estate taxes can be complicated and you should seek the advice of a qualified tax attorney or CPA who can give you advice for your individual situation.