Budgeting for Closing Costs

Many first-time buyers focus so completely on the down payment that closing costs arrive as a surprise. They are a separate set of fees and prepaid expenses due when your loan closes, and they vary widely by lender, loan type, price and location. Planning for them now is one of the most practical things you can do in week two.

What closing costs include

Closing costs fall into a few broad groups. Not every loan includes every item, and local customs affect who pays what.

Lender charges

These can include origination, application or underwriting fees. You may also see discount points, an optional upfront payment that lowers your interest rate.

Third-party services

These are services the loan requires, such as the appraisal, the credit report, a title search, lender’s title insurance and the fee for the settlement agent or closing attorney. Some areas also call for a survey or a pest inspection. Owner’s title insurance, which protects you rather than the lender, is optional in many places and worth understanding before you decide.

Government fees

Recording fees and, in many places, transfer taxes are set by state or local governments.

Prepaid items and escrow deposits

These are less fees than costs paid in advance: interest for the days between closing and the end of that month, often the first year of homeowners insurance, and an initial deposit into the escrow account your lender uses to pay property taxes and insurance on your behalf.

Reading your Loan Estimate

Within three business days of receiving your mortgage application, a lender must give you a Loan Estimate. It is a standard three-page form, which makes offers from different lenders easier to compare.

• Page 1 summarizes the loan terms, projected monthly payments and the estimated cash you will need to close.
• Page 2 breaks closing costs into lettered sections. Section A lists the lender’s own origination charges, Section B lists services you cannot shop for and Section C lists services you can. Sections E through H cover taxes and government fees, prepaid items, the initial escrow payment and other costs.
• Page 3 includes comparison figures, such as the annual percentage rate (APR) and the total interest percentage.

Ways buyers reduce or cover closing costs

• Shop the services you are allowed to shop for. Section C of your Loan Estimate shows which ones.
• Compare lender charges. Section A is where lenders differ most directly.
• Ask about seller concessions. In some markets, buyers negotiate for the seller to pay part of the closing costs. Loan programs limit how much a seller can contribute.
• Understand lender credits. Some lenders offer a credit toward closing costs in exchange for a higher interest rate. It lowers your cash at closing but raises your cost over time.
• Check assistance programs. Some down payment assistance programs can also be used toward closing costs.

Be careful with offers that seem to make closing costs disappear. Those costs are usually covered through a higher rate or a larger loan balance. That can be a reasonable choice, but it should be a deliberate one.

The Closing Disclosure and closing day

At least three business days before closing, your lender must give you a Closing Disclosure with the final terms and costs. Put it next to your Loan Estimate and compare them section by section. Some charges generally cannot increase, some can rise only within set limits, and others, such as prepaid interest and escrow deposits, can legitimately change. Ask your lender to explain any difference you do not understand before you sign.

Protect your closing funds

Criminals target homebuyers with fake emails that appear to come from a title company, real estate agent or lender and contain new wiring instructions. Before you send any money, call the company using a phone number you already have from a trusted source, not one listed in the email, and confirm the instructions. Treat any last-minute change to wiring details as a warning sign.

Build closing costs into your plan

Open a separate savings line for closing costs so the money is not mixed with your down payment or emergency fund. Then add a smaller line for costs that come right after closing: movers, utility deposits, basic tools and early repairs.

Your first mortgage payment is usually due a month or more after closing. It is far easier to handle when the move has not already drained your accounts, so count it in your plan now rather than discovering it later.