What are 'Closing Costs'

Closing costs are expenses over and above the price of the property in a real estate transaction. Costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners' insurance, and the lender states these costs in a "good faith estimate within three days of a home loan application.

BREAKING DOWN 'Closing Costs'

Closing costs occur when the title of property is transferred from the seller to the buyer, and may be paid by either party. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between 2 to 5% of the purchase price.

Examples of Closing Costs

Origination fees are fees charged by the bank for the creation of a loan. The fee is typically 1% of the mortgage. The buyer can purchase discount points up front to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are negotiable and can be covered by the bank. Private mortgage insurance is an additional fee applied to any purchase with a down payment less than 20%.

Title insurance protects the lender from claims against the house, and protects the buyer from past contractors making claims against the property. Lenders often require an appraisal, which costs up to $400 in most areas. Local governments charge recording fees and taxes to record the sale of property. These transfer taxes vary from state to state.

Loan Estimate and Disclosure Statement

Laws require lenders to provide a loan estimate that reveals the closing costs on the property. The lenders typically provides this estimate within three days of receipt of a loan application. At least three days prior to the closing, the lender should provide a closing disclosure statement outlining all closing fees. The listed fees may have changed from the loan estimate.

No-Closing-Cost Mortgage

No-closing-cost mortgages eliminate all upfront fees for the buyer upon closing. These types of mortgages are beneficial in the short term, but likely result in higher interest rates. The closing costs can be buried into the total mortgage, which means the buyer pays interest on the closing costs over time. Therefore, while no-closing-cost mortgages are helpful in reducing initial capital outlay, there are long-term financial ramifications to consider.

RELATED TERMS
  1. Loan Application Fee

    A fee charged to process an application for a loan, such as a ...
  2. Origination Fee

    An up-front fee charged by a lender for processing a new loan ...
  3. Good Faith Estimate

    An estimate of the fees due at closing for a mortgage loan that ...
  4. Fee

    A fee is a fixed price charged for a specific service and is ...
  5. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
  6. Utilization Fee

    An annual fee assessed by a lender against a borrower. The fee ...
Related Articles
  1. Personal Finance

    Watch Out for "Junk" Mortgage Fees

    So many fees are tacked onto a mortgage, that it's easy to pay more than you have to.
  2. Personal Finance

    Mortgage Fees That Can Trash Your Refinance Deal

    Before deciding that refinancing your mortgage at a lower interest rate is a good deal, factor all the fees into your calculations.
  3. Personal Finance

    Looking for The Best Mortgage Rate? Follow These 6 Steps

    A step-by-step guide to finding and locking in the best rate for a mortgage.
  4. Personal Finance

    How to Lower Refinance Closing Costs

    Refinancing a mortgage can save you money but it isn't free. There are closing costs associated with a refinance and how much you pay for them depends on you.
  5. Retirement

    When Are Mortgage Lenders Better Than Banks?

    Individuals seeking a mortgage loan should consider factors or circumstances that may make a mortgage lender a better choice than a traditional bank.
  6. Personal Finance

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
  7. Personal Finance

    Can a Mortgage Company Change the Terms?

    Buying a home? You'll need this guide on when a mortgage company can change your terms and why various closing costs can go up – or down.
  8. Personal Finance

    Car Title Loan Requirements

    Here's a list of what you need to qualify for a car title loan. Most important: having sole ownership of your car with no liens.
RELATED FAQS
  1. What Home-Buying Costs Can I Deduct from Taxes?

    Except for interest, points, real estate taxes and PMI, costs to acquire a home increase the asset’s tax basis and are not ... Read Answer >>
  2. Are good faith estimates (GFEs) accurate?

    Learn how federal guidelines regarding good faith estimates protect consumers under the revised 2010 version of the Real ... Read Answer >>
  3. When is an underwriting fee too high on a commercial loan?

    Learn about underwriting fees and when they're too high. If the underwriting fee exceeds 2% of the total loan size, the fee ... Read Answer >>
Hot Definitions
  1. Book Value

    1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated ...
  2. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  3. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  4. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  5. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  6. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
Trading Center