What is included in closing costs?
Closing costs are every charge required to originate, insure and record the mortgage, plus the prepaid amounts collected in advance. They fall into three groups: lender fees, third-party services and prepaid or escrow items.
Only the first group is set by the lender. The second is largely market-priced by title companies, appraisers and government offices, and the third is determined by your property taxes, insurance premium and closing date.
- Lender: origination, underwriting, discount points if elected.
- Third party: appraisal, credit, title, settlement, recording and state taxes.
- Prepaid: interest through month end, first-year homeowners insurance.
- Escrow: initial deposits toward property taxes and insurance.
Why does the closing date change the total?
Prepaid interest is charged from your closing date through the end of that month, so closing later in a month reduces prepaid interest. Escrow deposits also shift depending on where the closing falls relative to tax and insurance due dates.
This is why two identical loans can show different cash-to-close figures. The loan is the same; the calendar is not.
How do seller-paid costs and lender credits work?
A purchase agreement can provide for the seller to contribute toward the buyer's closing costs, subject to loan program limits that vary by program, occupancy and down payment. Those contributions generally cannot be applied to the down payment.
A lender credit works differently: it reduces cash at closing in exchange for a higher interest rate. Whether that trade is worthwhile depends almost entirely on how long you expect to keep the loan.
- Seller contributions are negotiated in the purchase agreement.
- Program limits cap how much can be credited.
- Lender credits trade rate for reduced cash to close.
- Discount points do the reverse: more cash now, lower rate.
How should you read a Loan Estimate?
The Loan Estimate is a standardized disclosure, which makes it the right document for comparing offers. Compare the same sections across lenders rather than comparing a rate quote to a full estimate.
Look at loan amount and term first, then the lender fee section, then the prepaid and escrow section, and only then the bottom-line cash to close. Differences in the escrow section usually reflect timing assumptions, not a better deal.
How can closing costs be reduced?
The realistic levers are negotiating a seller contribution, choosing a lender credit structure, shopping the services you are permitted to shop, and timing the closing date. Program selection also matters, because upfront insurance or funding fees differ between conventional, FHA and VA financing.
Estimates provided before an application are illustrative only. Actual costs depend on the loan program, property, credit profile, closing date and third-party charges, and are disclosed on your Loan Estimate and Closing Disclosure.
Common questions
- What are closing costs on a Minnesota mortgage?
- Closing costs are the lender, third-party and prepaid items required to originate and record a mortgage. They typically include origination and underwriting fees, appraisal, credit and title charges, recording fees and state deed or mortgage registry taxes, plus prepaid interest, homeowners insurance and escrow deposits.
- Can the seller pay my closing costs?
- Sellers can contribute toward a buyer's closing costs when the purchase agreement provides for it, subject to loan program limits that vary by program, occupancy and down payment. Seller contributions generally cannot be applied to the down payment.
- What is a lender credit?
- A lender credit reduces the cash needed at closing in exchange for a higher interest rate. It can be a good fit when cash is tight or the loan is expected to be short-lived, and a poor fit when the loan will be held for many years.
- Are escrow deposits the same as closing costs?
- Escrow deposits are collected at closing but they are prepaid items rather than fees. They fund your future property tax and insurance payments, so unlike a fee, that money is applied to your own obligations.
For illustration only. Not a commitment to lend, a rate quote, or a Loan Estimate. Actual payments and terms depend on credit, property, program and market conditions at the time of application.