Closing costs: They involve more than the down payment
The Consumer Financial Protection Bureau breaks down closing costs into several categories
- Origination charges
- Services you cannot shop for
- Services you can shop for
- Taxes and other government fees
- Initial escrow payment at closing
- Other costs
Closing costs are a part of every mortgage and can cost a homebuyer thousands of dollars. When budgeting for your new house, it's important to keep these costs in mind.
Know your costs
Within three days of applying for a loan, your lender must provide you with a Loan Estimate form, which details all anticipated costs of your mortgage, including closing costs. The first page of this form will estimate the total closing costs, as well as the total "cash to close." The cash-to-close amount is the total that you will need to pay at your closing appointment, and it includes closing costs and the down payment.
The second page of the Loan Estimate will provide a detailed breakdown of the estimated closing costs, including:
- Origination charges. Fees charged by a lender to originate your loan. These fees may vary from lender to lender.
- Services you cannot shop for. These are services mandated by, and chosen by, your lender. These may also vary and are worth comparing between lenders.
- Services you can shop for. These are services required by the lender, but for which you can shop around. Lenders will, however, provide you with a list of approved providers for each service. If you want to use a provider not on the list, double check with your lender that the provider is OK to use. Finding the best deals on some of these services is one way to reduce your closing costs.
- Taxes and other government fees. These do not include property taxes.
- Prepaids. These can include money to pay some property taxes, insurance costs or the interest due on your loan between closing and the date of your first mortgage payment.
- Initial escrow payment at closing. If you have an escrow account as part of your mortgage, these payments will go into that account.
- Other. Any other fees that need to be paid, or optional fees.
At least three days before your closing appointment, your lender must provide you with another form, called the Closing Disclosure. This form includes all final costs associated with your mortgage, including closing costs. Much like the Loan Estimate, this form also includes the total closing costs, and cash to close, with a breakdown of closing costs available.
The closing-cost breakdown on the Closing Disclosure will include what company performed necessary services, and what costs, if any, are paid by the seller or any other entity. If anything on the Closing Disclosure is not in line with the Loan Estimate, or if you have any questions about any of the charges, be sure to discuss those issues with your lender before signing any of your closing paperwork.
Examples of the Loan Estimate and Closing Disclosure forms are available from the Consumer Financial Protection Bureau (CFPB).
Saving on closing costs
There is no way to eliminate closing costs. Such costs are, unfortunately, a fact of the homebuying process.
Some lenders will advertise mortgages that include closing costs. The CFPB, however, notes that these lenders will either charge higher interest rates, or add the closing costs into the loan amount, causing a higher monthly payment to recoup those costs. When comparing lenders, be sure to be clear on how they are calculating costs.
There are ways to possibly reduce the amount of closing costs you need to pay. First, analyze costs across multiple lenders — comparing their fees as well as interest rates. You also can attempt to negotiate these fees with your lender.
Second, shop around for certain services — such as appraisal, pest-inspection or title-insurance services — to ensure you are getting the best possible deal. Just make sure the lender allows you to shop for those services and, if so, that your lender will approve the vendors you choose to provide the services.
Also, when submitting your offer on a house, you can request that the seller pay a certain amount of the closing costs, or all of them. Be cautious with this tactic, however, because it could make your offer weaker in the seller's eyes.