What Are Closing Costs?

Closing costs are expenses, over and above the price of the property that buyers and sellers incur when they transfer ownership of a property. Closing costs vary depending on price, location, and other factors.

Closing costs and who pays them vary by location and may be open for negotiation between the buyer and seller. The agreement that you and the seller make should be stated in the sales contract to show who is responsible for what costs.

Depending on your situation, these are the types of costs usually paid at closing.

Common fees

• Origination fee - A fee that covers the costs of making the loan. It may be expressed as a percentage of the loan.
• Discount points - A point is equal to 1 percent of the loan amount. The more points you pay, the lower the interest rate on the loan, and vice versa.
• Appraisal fee - A fee for an independent written report that provides the property's current market value.
• Credit report fee- A fee to obtain a document summarizing your history of repaying debts.
• Flood certification fee - A fee charged to obtain the required government document used to determine whether the subject property is located in a flood plain.
• Underwriting fee - A fee charged to review and approve the mortgage application.

Items paid in advance

• Prepaid interest - Interest is the cost of borrowing money from your lender. You will probably have to pay the interest on the mortgage from the closing date to the beginning of the period covered by the first monthly mortgage payment.
• Homeowner's insurance - This is the annual premium for your insurance.
• Property taxes - Sufficient amount for the next periodic billing by your local government.

Initial escrow payment (for reserve)

• Homeowner's insurance - In addition to the annual premium collected at closing, the lender may collect funds as a buffer for any possible increases in premium.
• Property taxes reserves - The lender usually collects funds as a buffer for any possible increases in tax rates or property values.

Title charges and related expenses

• Settlement fee - Fees collected by the  settlement agent or attorney handling the closing. The funds are collected and paid as part of the transaction.
• Title search and title insurance - Covers the cost of examining the public records and obtaining title insurance that protects the lender. Also provides insurance to buyers of real estate that they have clear title to the property they are buying, subject to any exceptions contained in the policy.

Government recording and transfer charges

• Recording fees and transfer taxes - Charged by most states for recording the documents, and for a purchase, transferring ownership of the property. 

Additional charges

• Survey - If required, this covers a check of the boundary lines of the property and the location of permanent structures by a surveyor and a drawing outlining the exact dimensions of the property.
• Pest inspection - Required for purchase transactions and some refinances.
• Private mortgage insurance (PMI) - Additional insurance for non-government loans written by a private company, protecting the lender from mortgage default. It is generally required when you finance a house with less than a 20% down payment, but that may vary depending on the loan program.  
• Mortgage insurance premium (MIP) – Additional insurance for FHA loans. It is generally required regardless of down payment amount.
• Funding fee – A one-time fee that is required if you are getting a Veterans Administration (VA) loan.