What Are Mortgage Closing Costs?

Closing costs at a glance

Buying a home usually requires more than a down payment. Buyers may also need funds for loan-related charges, title and settlement services, prepaid expenses, property inspections, and other transaction costs.

Key points:

• Closing costs are separate from the down payment.
• Common charges include appraisal, title, settlement, recording, and lender origination costs.
• Property taxes, homeowners insurance, and prepaid interest may also affect the total due at closing.
• Some expenses may be paid before closing rather than on closing day.
• Your Loan Estimate and Closing Disclosure provide the transaction-specific amounts.

Closing costs vary based on the loan, property, location, service providers, transaction structure, and applicable lending requirements. There is no single fee schedule that applies to every buyer.

What are closing costs?

Closing costs are the charges associated with obtaining a mortgage and completing a real estate transaction. They may be paid to the lender, appraiser, title company, settlement provider, government agencies, insurers, attorneys, and other service providers.

Freddie Mac explains that closing costs commonly include appraisal fees, credit report fees, lender origination charges, title services, government recording charges, tax services, surveys, and attorney fees where applicable. As a broad budgeting reference, Freddie Mac says closing costs often total approximately 2% to 5% of the purchase price, although an individual transaction may fall outside that range. Your actual amount depends on the details of your purchase and financing.

Closing costs are not the same as a down payment:

• The down payment is the portion of the purchase price you are paying from your own eligible funds or another permitted source.
• Closing costs cover the services, taxes, insurance items, and administrative work needed to complete the purchase and mortgage.

What should you expect to pay for besides the down payment?

The expenses generally fall into four groups:

1. Loan and lender charges
2. Property-related services
3. Title, settlement, and government charges
4. Prepaid expenses and initial escrow deposits

You may also have expenses outside the mortgage closing documents, such as a home inspection, moving expenses, repairs, utility deposits, or homeowners association application charges.

Appraisal fee

An appraisal is an independent professional opinion of a property’s value. A lender may use it to evaluate whether the property provides sufficient collateral for the requested mortgage.

The appraisal charge generally pays for:

• The appraiser’s property research
• An inspection or observation of the property, when required
• Analysis of comparable properties
• Preparation of the appraisal report

The exact appraisal charge varies by location, property type, size, complexity, availability of qualified appraisers, and the type of valuation required. A large rural property, investment property, multi-unit home, or unusually complex property may cost more to evaluate than a typical single-family residence.

The appraisal is frequently paid before closing because the service is performed while the loan is being processed. Paying for an appraisal does not guarantee that the loan will be approved or that the transaction will close.

In some transactions, an appraisal waiver or another valuation method may be available. Availability depends on the loan, property, automated underwriting findings, investor requirements, and lender guidelines.

Loan origination charges

Origination charges are lender fees associated with creating, processing, underwriting, and closing the mortgage.

Depending on how the lender labels its charges, this section may include:

• Application fees
• Origination fees
• Processing fees
• Underwriting fees
• Administrative fees
• Verification-related charges
• Other lender charges

The Consumer Financial Protection Bureau advises borrowers to focus on the total origination charges when comparing offers because lenders may group or label individual items differently.

Origination charges appear in Section A of the “Loan Costs” section on Page 2 of the Loan Estimate. Comparing this section across Loan Estimates can help you evaluate the lender-controlled portion of each offer.

Fees, pricing, eligibility, and loan terms vary. A lower charge in one category does not necessarily mean the entire loan is less expensive, so compare the complete Loan Estimate rather than a single line item.

Title search and title insurance

Title work helps determine whether the seller has the legal right to transfer the property and whether liens, claims, unpaid taxes, ownership disputes, or other issues affect the title.

Lender’s title insurance

A lender’s title insurance policy generally protects the mortgage lender against certain covered title defects. It does not provide the same protection to the homeowner.

When required, the buyer commonly pays the premium as part of the transaction’s title charges. Requirements vary by loan type, investor, jurisdiction, and transaction.

Owner’s title insurance

An owner’s title insurance policy is separate from the lender’s policy. It generally protects the homeowner’s ownership interest against certain covered title problems.

Owner’s coverage may be optional or handled differently depending on state law, local custom, and the purchase agreement. Buyers should ask the title or settlement professional:

• Whether the quoted charge includes lender’s coverage, owner’s coverage, or both
• What each policy covers and excludes
• Whether a simultaneous-issue or bundled price applies
• Whether the owner’s policy is optional in the applicable jurisdiction

A licensed title professional or real estate attorney can explain the specific policy and legal considerations. Mortgage professionals should not be relied upon for legal advice.

Settlement, escrow, or attorney charges

A settlement agent, title company, escrow company, or attorney may coordinate the closing, depending on local practices and state law.

Possible charges include:

• Settlement or closing fee
• Escrow service fee
• Document preparation
• Notary services
• Courier or electronic document delivery
• Attorney services
• Title examination
• Recording coordination

The term “escrow” has two different meanings in a home purchase:

1. ‍Transaction escrow: A neutral party holds documents and funds while the purchase is being completed.‍
2. Mortgage escrow account: After closing, the mortgage servicer may collect part of the projected property taxes and insurance expenses with each monthly payment and pay those bills when due.

Not every borrower is required to maintain a mortgage escrow account. Requirements and options depend on the mortgage, property, lender, investor guidelines, applicable law, and borrower eligibility.

Government recording fees and transfer charges

State and local governments may charge fees to record the deed, mortgage, deed of trust, or other documents in the public records.

A transaction may also involve:

• Transfer taxes
• Mortgage taxes
• Local assessments
• Municipal certification charges
• Other state or local charges

Who pays these items can depend on state law, local custom, and the purchase contract. Your settlement professional can explain which charges apply to the property.

Credit report and verification charges

A lender may obtain credit reports and other third-party verifications during the mortgage process. Charges may include credit reporting, flood-zone determination, tax monitoring, employment verification, or other required services.

The specific services and amounts vary by loan and lender.

Homeowners insurance

Most mortgage lenders require acceptable homeowners insurance to be in place before closing.

The amount due before or at closing may include:

• The first policy premium
• An initial deposit for an escrow account, when applicable
• Additional coverage required for the property

Insurance premiums vary considerably based on the property, location, coverage limits, deductible, claims history, construction features, and insurer.

A standard homeowners policy generally does not cover flooding. Separate flood insurance may be required when the property is in a designated flood hazard area, and a buyer may choose to obtain it in other areas.

Property taxes and initial escrow deposits

Depending on the transaction and tax schedule, buyers may need funds for:

• Property taxes due at or near closing
• A prorated reimbursement to the seller
• An initial deposit into a mortgage escrow account
• Tax-related adjustments or assessments

The amounts depend on the property’s location, assessed value, tax cycle, closing date, applicable exemptions, and how the transaction is structured.

An escrow deposit is not an additional lender fee. It is money placed into an account for future payment of eligible property-related expenses. The initial deposit is calculated using projected bills and applicable escrow-account rules.

Prepaid interest

Mortgage interest generally begins accruing when the loan is funded. At closing, the borrower may pay interest covering the period between the closing date and the beginning of the first full payment cycle.

The amount depends partly on the closing date and loan amount. It is considered a prepaid expense rather than payment for a third-party closing service.

Mortgage insurance or program-related charges

Depending on the mortgage and financing structure, the transaction may include mortgage insurance or other program-related charges.

These could include:

• An upfront mortgage insurance amount
• An initial private mortgage insurance premium
• Guarantee or funding-related charges
• Ongoing mortgage insurance included in the monthly payment

Whether these apply, and whether an amount may be financed, paid at closing, or collected monthly, depends on the mortgage program and applicable guidelines.

Eligibility, documentation, terms, pricing, insurance requirements, and approval vary by borrower, property, lender, investor, and program.

Home inspection and other expenses outside closing costs

A home inspection is different from an appraisal.

• ‍An appraisal primarily evaluates the property for lending and valuation purposes.‍
• An inspection evaluates the home’s physical condition for the buyer.

Possible buyer expenses include:

• General home inspection
• Pest or wood-destroying organism inspection
• Sewer, septic, well, radon, mold, or structural evaluations
• Property survey
• Homeowners association application or transfer charges
• Moving expenses
• Immediate repairs or maintenance
• Utility deposits
• Initial reserves for homeownership expenses

Some inspections may be required by the purchase agreement, property condition, loan guidelines, insurer, or applicable law. Others may be optional but useful for evaluating the property.

Where can you find your exact closing costs?

Your lender generally provides two important documents.

Loan Estimate

After receiving the required application information, a lender generally must provide a Loan Estimate within three business days. The document includes estimated loan terms, projected payments, closing costs, prepaid expenses, and the estimated amount needed to close.

Important areas include:

‍Page 1: Estimated closing costs and estimated funds needed at closing

Page 2: Itemized loan costs, other costs, prepaid items, escrow deposits, and credits

Page 3: Comparison information and other loan details

The Loan Estimate is still an estimate. Some charges are subject to limits on how much they may increase, while others may change based on the final service, closing date, insurance premium, taxes, or a valid change in circumstances.

Closing Disclosure

The Closing Disclosure provides the final mortgage terms and closing-cost details. For most covered mortgages, borrowers must receive it at least three business days before closing.

Compare it with the most recent Loan Estimate and ask about:

• New or unfamiliar charges
• Material increases
• Changes in lender credits
• Seller credits
• Prepaid expenses
• Escrow deposits
• The final amount needed to close

Do not wait until the signing appointment to raise questions.

Why can closing costs change?

Changes may result from:

• A different closing date
• Updated property taxes
• The selected homeowners insurance policy
• A change in property or loan information
• A service selected from an approved provider list
• Additional title or legal work
• A revised appraisal requirement
• Changes requested by the borrower
• A valid change in circumstances
• Contract amendments or seller credits

Federal rules restrict increases for certain categories of charges, but not every cost is subject to the same tolerance standard. Ask the lender for an explanation when an estimated charge changes.

Can a seller or another party help with closing costs?

In some transactions, the seller, lender, builder, employer, government agency, nonprofit organization, or another eligible source may provide a permitted contribution or credit.

Availability and limits depend on:

• The mortgage program
• Occupancy and property type
• Purchase price and appraised value
• The amount of the buyer’s eligible costs
• Investor and lender guidelines
• The purchase contract
• Applicable legal and regulatory requirements

A credit may reduce the buyer’s eligible closing expenses, but it generally cannot be used without limitation or simply returned to the buyer as excess money. The transaction must comply with the applicable mortgage and source-of-funds rules.

How to prepare for closing costs

Review the Loan Estimate early

Ask your loan officer to explain each section, including lender charges, third-party services, prepaid expenses, escrow deposits, credits, and the estimated amount needed to close.

Compare complete offers

Do not compare only one fee. Review the loan terms, lender charges, services, credits, mortgage insurance, projected payments, and total costs together.

Ask which charges are paid before closing

The appraisal, inspection, insurance premium, or other services may be due before the closing date.

Keep additional funds available for homeownership

Closing is not the end of the expense of owning a home. Consider maintaining appropriate reserves for repairs, maintenance, deductibles, utilities, taxes, insurance changes, and other property expenses.

Verify how funds must be delivered

Before sending money, confirm wiring or payment instructions through a trusted phone number or another independently verified method. Real estate wire fraud can involve messages that appear to come from a legitimate lender, agent, attorney, or title company.

Questions to ask your loan officer

Consider asking:

• What costs are due before closing?
• Which charges are controlled by the lender?
• Which services may I shop for?
• Does the title quote include both lender’s and owner’s coverage?
• Will I have a mortgage escrow account?
• What prepaid taxes, insurance, or interest are included?
• What assumptions were used to estimate the amount needed to close?
• What could cause the estimate to change?
• When will I receive the Closing Disclosure?
• How should I verify the final instructions for providing funds?

The bottom line

Your down payment is only one part of the funds needed to purchase a home. Appraisal charges, lender origination costs, title services, recording charges, insurance, taxes, prepaid interest, escrow deposits, and property inspections may also affect your upfront budget.

There is no universal “exact” amount for these expenses. The most reliable estimate is the Loan Estimate prepared for your specific application, property, loan structure, and location. Review it carefully with a licensed mortgage professional and compare it with the final Closing Disclosure before signing.

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This information is provided for general educational purposes and is not financial, legal, tax, or insurance advice. Loan programs, payment structures, escrow requirements, insurance requirements, terms, documentation, pricing, and eligibility vary by borrower, property, market, and applicable guidelines. All loans are subject to approval. Equal Housing Lender.

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Sources

Consumer Financial Protection Bureau, “Loan Estimate Explainer”

Consumer Financial Protection Bureau, “What fees or charges are paid when closing on a mortgage and who pays them?”

Consumer Financial Protection Bureau, “What costs come with taking out a mortgage?”

Freddie Mac, “Understanding Homebuying Costs”

Fannie Mae, “Closing Costs Calculator”

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