Saving for a down payment is usually one of the first financial goals prospective homebuyers think about.
But your down payment is not the only money you may need when purchasing a home.
Mortgage and real estate transactions involve additional expenses collectively known as closing costs. Understanding these expenses early can help you establish a more accurate home-buying budget.
What Are Mortgage Closing Costs?
Closing costs are the upfront expenses associated with obtaining your mortgage and completing the transfer of the property.
The Consumer Financial Protection Bureau describes closing or settlement costs as the upfront costs charged to obtain the loan and transfer ownership.
They can include expenses paid to the lender as well as costs charged by third parties involved in the transaction.
Your exact expenses depend on your loan, property, location, transaction structure, and other factors.
What Types of Costs Could You See?
Common expenses may include categories such as:
- Loan origination or lender charges
- Appraisal expenses
- Credit or verification services
- Title-related charges
- Escrow or settlement services
- Recording or government charges
- Homeowners insurance
- Prepaid interest
- Property tax-related amounts
- Initial escrow funding
- Mortgage insurance or program-specific fees when applicable
The CFPB identifies common closing expenses including appraisal costs, title insurance, government charges, prepaid property taxes, homeowners insurance, and interest before the first scheduled payment.
Not every transaction will include the same fees.
How Are Closing Costs Different From the Down Payment?
Your down payment is the portion of the home’s purchase price you pay rather than finance.
Your closing costs are the costs associated with establishing the loan and completing the transaction.
Your cash to close generally brings those pieces together while also accounting for deposits, credits, adjustments, and other transaction-specific amounts.
For example, estimated cash to close may include your down payment and closing costs, reduced by an earnest-money deposit already paid and applicable seller or lender credits.
This is why simply saving the minimum down payment may not provide a complete picture of how much cash you will need.
How Much Should You Budget for Closing Costs?
There is no single number that applies to every purchase.
As a broad planning estimate, the CFPB notes that closing costs excluding the down payment often fall in a range of approximately 2% to 5% of the home purchase price. Actual costs can be higher or lower depending on the transaction.
On a higher-priced property, even a relatively small percentage can represent a meaningful amount of cash.
That makes it important to discuss estimated costs early rather than waiting until the end of escrow.
What Is the Loan Estimate?
After you formally apply for a mortgage and provide the required information, you generally receive a standardized document called a Loan Estimate.
Among other information, the Loan Estimate shows the estimated interest rate, payment, and closing costs associated with the proposed loan.
It also provides a structured way to examine:
- Loan terms
- Projected payments
- Origination charges
- Services required by the lender
- Other transaction costs
- Estimated cash to close
When comparing mortgage choices, look beyond the interest rate alone. Fees, points, credits, mortgage insurance, and other loan features can all affect the overall cost.
Can Some Closing Costs Be Reduced?
Possibly.
Certain transaction expenses may be influenced by how the loan is structured or negotiated.
For example, a lender credit may reduce the amount paid upfront, but the credit may be associated with a different interest rate. The CFPB recommends understanding the tradeoff between lender credits and the loan’s rate and overall cost.
In some transactions, a seller may agree to contribute toward allowable buyer closing costs, subject to the purchase contract and applicable loan-program limits.
Some services may also be eligible for comparison shopping, depending on the transaction.
The important point is that “lower cash at closing” does not automatically mean “lower overall loan cost.” Evaluate the entire financing structure.
What Are Prepaid Costs?
Some items appearing at closing are not necessarily fees for obtaining the mortgage.
They are amounts you are paying in advance for expenses associated with owning the property.
Examples can include:
- Homeowners insurance premiums
- Property taxes
- Prepaid mortgage interest
- Initial deposits into an escrow account
That distinction matters when reviewing the numbers because these expenses serve a different purpose from lender origination charges.
When Do You Learn the Final Amount?
Before consummation, borrowers generally receive a Closing Disclosure showing the final loan terms and closing costs.
Federal mortgage disclosure rules generally require the Closing Disclosure to be provided at least three business days before closing for covered transactions, giving the borrower time to review the final figures.
Compare it with your Loan Estimate and ask questions about meaningful differences.
Plan for the Whole Purchase, Not Just the Down Payment
A well-prepared homebuyer thinks about the full amount required to complete the purchase.
Your mortgage professional can help you estimate potential closing costs before you have a property under contract so that you can establish a more realistic savings goal.
If you are considering a home purchase, contact Ensure Lending to discuss your estimated down payment, cash-to-close needs, and potential financing options before you begin making offers.
All figures are estimates until finalized. Actual closing costs depend on the property, loan program, transaction, third-party charges, taxes, insurance, and other factors.
