Long story short – closing costs are fees related to the purchase of your home.

These are fees above and beyond your down payment. They’re charged by lenders and third parties and are typically between 2 – 5% of your home’s purchase price.

Like your down payment, you’re typically required to pay them upon closing. With some loans, such as VA loans, the seller pays a portion of the closing costs. But, generally you incur this cost.

What do your Closing Costs Cover?

Closing costs can encompass a wide variety of fees depending on the region in which you live and property you are buying. They could include:

  • Credit Report – a fee for running your credit report
  • Loan Origination – a fee for processing your loan paperwork
  • Attorney – any attorney’s fees associated with the purchase
  • Inspection – any charges associated with home inspections requested by you or your lender
  • Discount Points – Fees you pay in exchange for a lower interest rate
  • Survey – a fee for verifying property lines
  • Title Insurance – an insurance which protects the lender in case the title isn’t clean
  • Title Search – a fee for a title background check to ensure there are no unpaid mortgages or tax liens on the property
  • Escrow Deposit – a fee which could possibly pay for a couple months’ property taxes and private mortgage insurance
  • Pest Inspection –a fee for inspecting for pests
  • Recording – a fee paid to the city or county in exchange for recoding the new land records
  • Underwriting – a fee which covers evaluation of a mortgage loan application

Will you know your Closing Costs Upfront?

Kind of. By law, lenders are required to give you a good faith estimate (GFE) of what they believe your closing costs will be. They must give you a GFE within three day from the time you submit your loan application. However, this is just an estimate. Many of the fees included within the GFE can legally change by up to 10%, which could potentially add thousands of dollars to your final closing costs.

What if your Closing Costs Change Drastically?

Within one day of your closing, your lender should give you a HUD-1 settlement statement. This will outline your closing costs. Compare it to the GFE they previously gave you. If there are major changes in price, ask your lender to explain each line item that increased your closing costs and why it is needed. It’s not uncommon that some of your closing costs fees are negotiable.

What About No-Closing Cost Mortgages?

While some lenders do offer closing cost free mortgages, you typically incur these costs in the long run. Sometimes this is through a higher interest rate. In some cases, a lender may wrap the closing costs into the overall cost of the loan.

Additionally, some homebuyers are able to negotiate with the seller to assume their closing costs. Thus, providing a closing cost free mortgage.