Closing costs, explained clearly.
Closing costs are the page of fees that arrives after your offer is accepted. This guide translates the common line items, who they pay, and which costs can change.
What closing costs actually are
Closing costs are the one-time charges for creating your loan and transferring the home, paid at the closing table on top of your down payment. A common rule of thumb puts them at 2 to 5 percent of the loan amount, and your own estimate will give you a clearer picture. The real answer lives in two documents: the Loan Estimate, which a lender must send within three business days after you apply, and the Closing Disclosure, which you receive at least three business days before signing. Same layout, same line items. Comparing them side by side can help you see what changed and decide what to ask your lender.
The costs fall into three buckets. Lender fees pay the lender. Third-party fees pay everyone else involved, like the appraiser and the title company. Prepaids and escrow deposits are not really fees at all: they are your own bills, collected early. Sorting a charge into the right bucket is most of understanding it.
Bucket one: lender fees
Origination charges are the lender's price for making the loan. Sometimes this is one line. Sometimes it is broken into processing, underwriting, and administration fees. The labels vary. The total is what matters, and the total is one of the few numbers that genuinely differs between lenders, which is why comparing Loan Estimates side by side is worth taking time to review.
Discount points are optional prepaid interest. One point costs 1 percent of the loan amount and typically lowers the interest rate by roughly a quarter percent, though the exact trade varies. Points are a bet that you will keep the loan long enough for the lower monthly cost to repay the upfront cost. If you might move or refinance in a few years, points often lose that bet. Ask your lender to walk through that break-even calculation with you before deciding.
Credit report and flood certification fees are small pass-through charges for pulling your credit and checking whether the home sits in a flood zone. They are usually modest, and they are usually real.
Bucket two: third-party services
The appraisal pays a licensed appraiser to estimate the home's market value. The lender orders it, you pay for it, and the report protects both sides from a price the market will not support. The title search and title insurance confirm that the seller actually owns the home free of old claims, and insure against problems the search missed. There are two policies: one protects the lender, which you pay for, and an owner's policy that protects you, which in many places the seller traditionally pays for. Ask which tradition applies to your purchase, because it is negotiable in some transactions.
Escrow and settlement fees pay the neutral company that holds the money and documents until every condition is met. In California, escrow is a standard part of the process rather than an optional extra. Recording fees go to the county for filing the deed and mortgage, and transfer taxes are set by state and local law. In Sacramento County, who pays the transfer tax is a matter of custom and negotiation, so it helps to confirm the arrangement in your purchase contract.
Bucket three: prepaids and escrow deposits
This bucket confuses people most, because the numbers look like fees and are not. Prepaid interest covers the days between your closing date and the end of that month, because mortgage interest is paid in arrears. Close late in the month and this line shrinks, which is one small reason timing matters. Homeowners insurance is usually collected for the first year upfront. Property taxes may be collected for the months between the last paid bill and your closing.
On top of the prepaids, most lenders collect an initial escrow deposit: a cushion of a few months of taxes and insurance, so the account that pays those bills for you never runs dry. California and federal rules cap how large that cushion can be. It is your money, held for your bills, and it is refunded or credited if you pay the loan off. It still belongs in your cash-to-close planning, even though it is money set aside for your bills rather than a service fee. Our affordability guide explains how escrow works month to month.
Three helpful rules about changes
Federal law sorts closing costs by how much they may change between the Loan Estimate and the final disclosure. First, some fees cannot increase at all: the lender's own charges and the cost of required services from providers the lender chose. Second, some fees can rise, but only 10 percent in total as a group: recording fees and required services you were allowed to shop for but took from the lender's list. Third, some charges can change freely because nobody controls them in advance: your chosen insurance, taxes, and daily interest. If a fee in the first two buckets jumps, you are owed an explanation, and possibly a refund of the excess. Your lender can help you understand which rule applies to a particular charge.
Questions to ask before you sign
- Which of these fees are yours, and which can I shop for myself?
- Did anything in the no-change or 10-percent buckets increase since the Loan Estimate? Why?
- Are discount points included? If so, show me the break-even math.
- How many months of taxes and insurance are in the escrow deposit, and is that the legal cap or below it?
- Who pays the owner's title policy and the transfer tax in this transaction?
These are welcome questions to bring to your lender. You deserve time to understand the answers before taking the next step.
Frequently asked questions
How much are closing costs, in total?
A common rule of thumb is 2 to 5 percent of the loan amount, but it depends on the loan, the lender, and local taxes and customs. The only number that matters is the itemized total on your own Loan Estimate and Closing Disclosure.
Can closing costs change after the estimate?
Some cannot change at all, some can rise up to 10 percent in total as a group, and some, like taxes, insurance, and prepaid interest, can move with timing and actual bills. Federal rules sort fees into those three buckets. The three change rules in this guide are the ones to hold your lender to.
What is the difference between closing costs and prepaids?
Closing costs pay for the work of making the loan. Prepaids are your own bills, like insurance and taxes, collected early at closing. Prepaids are your money covering your obligations, not fees paid to anyone for profit.
Have a question as you read? You can call or text me at (408) 406-7900.