Closing Costs Explained: What to Expect at the Closing Table

What Are Closing Costs?

Closing costs are the fees and charges you pay to complete a mortgage transaction. They cover services such as loan origination, appraisal, title insurance, taxes, settlement services, and homeowner’s insurance. These costs are separate from your down payment and can add up to a significant amount, so it’s important to understand what you’re paying for.

The exact items and amounts vary by lender, location, and the specifics of your transaction. However, the Consumer Financial Protection Bureau (CFPB) provides a standard breakdown through the Closing Disclosure form, which itemizes every cost in two main categories: Loan Costs and Other Costs. Knowing these categories helps you compare offers and spot any unexpected fees.

Sources: Consumer Financial Protection Bureau

Typical Closing Costs

The Closing Disclosure groups costs into two main buckets: Loan Costs and Other Costs. Loan Costs are fees charged by the lender and for services you might shop for, while Other Costs cover taxes, prepaids, and other settlement charges.

• Loan Costs include origination charges (loan origination, underwriting), services you did not shop for (appraisal, credit report, flood determination), and services you did shop for (pest inspection, survey, title services).
• Other Costs include taxes and government fees, prepaids such as homeowner’s insurance premiums, prepaid interest, and property taxes, initial escrow payment at closing, and other items like HOA fees, home inspection, home warranty, real estate commissions, and owner’s title insurance.

Sources: Consumer Financial Protection Bureau

Who Pays Closing Costs?

In most cases, the borrower pays all closing costs in a real estate transaction, unless the contract or state law specifies otherwise. Some costs may be split between buyer and seller, but that arrangement is typically negotiated and stated in the purchase agreement.

If you don’t pay these costs out of pocket, you might still pay them indirectly through the loan. For example, you could increase the loan amount to cover the costs or accept a higher interest rate in exchange for lender credits. In either case, the costs are still paid—they’re just financed as part of the loan.

Sources: Consumer Financial Protection Bureau

How to Estimate and Compare

When you apply for a mortgage, you’ll receive a Loan Estimate that itemizes the expected closing costs. Before closing, you’ll receive a Closing Disclosure—a final version of those costs. Comparing these two documents is key: the Loan Estimate shows what you were initially quoted, and the Closing Disclosure shows the actual amounts. The CFPB requires that the Loan Estimate be provided no later than three business days after you apply, and the Closing Disclosure must be received at least three business days before closing.

Review the items line by line. Look for changes between the Loan Estimate and Closing Disclosure. If significant changes occur (such as an APR increase, a loan product change, or a prepayment penalty being added), the lender must provide a new Closing Disclosure with an additional three-business-day waiting period.

Sources: Consumer Financial Protection Bureau

Ways to Reduce Closing Costs

You have options to lower your out-of-pocket closing costs, though they all involve trade-offs. One common approach is to use discount points: you pay an optional fee at closing that lowers your interest rate. One point equals 1% of your loan amount. The more points you pay, the lower your rate, but you’re paying more upfront.

Another option is lender credits: the lender provides you with credits to offset closing costs in exchange for a higher interest rate. This can reduce or eliminate your upfront costs, but you’ll pay more over the life of the loan.

You may also negotiate some fees. Lender fees—such as origination and underwriting charges—are generally easier to negotiate than third-party fees like appraisal or title insurance. You can negotiate up until signing, but the lender or seller can refuse changes.

Sources: Consumer Financial Protection Bureau

Closing Disclosure and Good Faith Estimate

The Closing Disclosure is the final form that itemizes all closing costs. It replaced the former Good Faith Estimate and HUD-1 Settlement Statement. The Good Faith Estimate was an initial disclosure that provided an estimate of your loan costs and other settlement charges. Under the integrated mortgage disclosure rule, its role is now split: the Loan Estimate provides the initial good-faith estimate, and the Closing Disclosure provides the final, accurate version at least three business days before closing.

The CFPB requires that the Closing Disclosure be provided at least three business days before closing. If certain significant changes occur after it’s issued—such as an APR increase, a loan product change, or adding a prepayment penalty—you must receive a new Closing Disclosure with an additional three-business-day waiting period. This protects you by giving you time to review and ask questions.

Sources: Consumer Financial Protection Bureau