Understanding Closing Costs

Closing costs are the fees and prepaid items due when your loan funds, on top of your down payment. They're one of the most common surprises for first-time buyers, so it's worth understanding them early.

The main categories

Lender charges

These come from the lender or broker for originating the loan. They can include an origination or processing fee, an underwriting fee, and discount points if you choose to pay them to lower your rate. More on that in mortgage points explained.

Third-party services

Services required to make the loan:

• Appraisal
• Credit report
• Title insurance (lender's policy)
• Escrow or settlement fee
• Flood certification
• Notary and courier fees

Government fees

Recording fees charged by the county, and in some cases transfer taxes. In California, documentary transfer tax exists at the county level and some cities add their own. Who pays it is often local custom or negotiated in the contract.

Prepaids and escrow deposits

These aren't fees as much as money paid in advance:

• Prepaid interest from your funding date to the end of that month
• Homeowners insurance, usually the first year's premium
• Initial deposit into your impound (escrow) account for future property taxes and insurance, if you have one

How much should I expect?

Total closing costs vary widely depending on the loan amount, the property's location, whether you pay points, and the time of year (which affects how much property tax needs to be collected). Rather than relying on a rule of thumb, I'd rather give you a written estimate based on your actual scenario.

Your Loan Estimate

Within three business days of applying, you'll receive a standardized Loan Estimate. It lists your rate, monthly payment and estimated closing costs in a format that's the same across lenders, which makes comparing easier.

When reading it, pay attention to:

• Section A (Origination Charges): what the lender itself charges
• Sections B and C: third-party services, and which ones you can shop for
• Sections F and G: prepaids and escrow deposits
• Cash to Close: what you'll actually need to bring

Before closing, you'll receive a Closing Disclosure with final numbers to compare against your estimate.

Ways to reduce your out-of-pocket costs

• Seller credits: in some markets, a seller may agree to contribute toward your costs. Programs set limits on how much.
• Lender credits: you can sometimes accept a slightly higher rate in exchange for a credit toward costs. This trades a lower upfront cost for a higher payment over time.
• Shopping services: where the Loan Estimate allows, comparing title or other providers can help.
• Timing: your closing date changes prepaid interest, though it doesn't change the overall cost of the loan much.

An example of the trade-off

These numbers are for illustration only. Suppose taking a rate 0.25% higher gives you a $4,000 lender credit, and raises your payment by $70 a month. You'd come out ahead on that choice if you sell or refinance within about 57 months ($4,000 ÷ $70). If you plan to stay longer, paying the costs upfront might make more sense.

Questions?

If you'd like a written estimate for a specific price range, or help reading a Loan Estimate you already have, contact me. When you're ready, you can also start your pre-approval.