Closing Costs

Updated 2026-05-17

Closing costs are fees paid at the closing of a real estate transaction, which is the final step in the loan process where ownership of the property is transferred or a new mortgage is finalized. These costs are separate from the Down Payment and typically include various charges from the lender, title company, government, and other third parties involved in the transaction. They are a significant component of the total cost of a mortgage, impacting the Annual Percentage Rate (APR).

Components of Closing Costs

Closing costs encompass a wide range of fees, often categorized based on their purpose and the party charging them.

Loan-Related Fees (Fees and Points)

"Fees and points" refer to upfront charges paid by a borrower to a lender at the time of closing a mortgage loan. These charges are typically expressed as a percentage of the loan amount, where one "point" equals one percent of the principal loan amount.

• Origination Charges/Points: Fees charged by the lender for processing the loan. These cover the lender's administrative costs, such as application, underwriting, and processing fees.
• Discount Points: Optional fees paid by the borrower to "buy down" or reduce the interest rate on the mortgage. Paying discount points can lower the monthly mortgage payment over the life of the loan.
• Appraisal Fees: Cost for a professional appraisal of the property's value.
• Credit Report Fees: Cost of obtaining the borrower's credit report.
• Flood Determination Fees: Actual amount charged by a third party for determining if a property is in a special flood hazard area, including a life-of-the-loan service.
• Prepaid Interest: Also known as "odd-days" or "per diem" interest, this is the interest paid by the consumer at loan consummation for the period between the closing date and the start of the first full payment period. Under Regulation Z, prepaid interest (both positive and negative) is included in the calculation of the Annual Percentage Rate (APR). For General QM ARMs, the maximum interest rate during the first five years must be used to calculate prepaid interest for APR purposes.

Property and Transaction-Related Fees

• Title Insurance: Protects the lender and borrower against defects in the property's title.
• Escrow Fees: Paid to the escrow agent for managing the closing process.
• Recording Fees: Paid to the local government for recording the new deed and mortgage.
• Survey Fees: Charge for a survey, if required by the lender or veteran.
• Pest Inspection Fees: Cost for a professional pest inspection.
• Prepaid Items: Such as property taxes and homeowner's insurance premiums, which are often paid in advance.
• Initial Escrow Payment at Closing: Funds collected at closing to establish the borrower's escrow account for future property taxes and insurance.
• Transfer Taxes: Taxes imposed by state or local governments on the transfer of real property.
• Real Estate Brokerage Fees: Commissions paid to real estate agents.
• Homeowner's or Condominium Association Charges: Fees paid at consummation.
• Home Warranties: Cost of a home warranty plan.

Credit Fees

Credit fees are charges associated with a mortgage loan that are typically based on the borrower's credit profile, loan characteristics, and other attributes. These fees contribute to the overall cost of the loan and can impact its affordability.

• Base Grid Credit Fees: Standard fees applied based on general loan characteristics and borrower profiles.
• Special Attributes Credit Fees: Additional fees that may be applied due to specific loan features or borrower attributes that present a higher perceived risk or require special consideration. Mortgage programs like Freddie Mac's Home Possible can reduce or eliminate these for eligible borrowers.

Closing Costs for Specific Loan Types

VA Loans

VA home loans offer the benefit of Limited Closing Costs, with the VA setting specific limits on the types and amounts of closing costs that lenders can charge to veteran borrowers.

VA loan closing costs are generally categorized into three main types: the lender's one percent flat charge, itemized fees and charges, and the VA funding fee.

1. Lender's One Percent Flat Charge: The lender may charge the veteran a flat charge not to exceed one percent (1%) of the loan amount. This covers the lender's costs and services not reimbursable as itemized fees. It covers items like loan closing/settlement fees, document preparation, attorney's services (other than title work), interest rate lock-in fees, and loan application/processing fees. For construction loans, an additional flat charge of up to 2% (if lender supervises construction) or 1% (if not) may apply. If the loan does not close, this fee must be refunded.
2. Allowable Itemized Fees and Charges: Veteran borrowers can pay for specific "itemized fees and charges" in amounts that are reasonable and customary. These include:
   • VA appraiser and compliance inspector fees.
   • Recording fees and taxes.
   • Credit report cost (or $50 evaluation fee for Automated Underwriting).
   • Prepaid items (taxes, assessments, initial escrow deposit).
   • Hazard insurance (including flood insurance).
   • Flood zone determination fee (if by third party).
   • Survey charge (if required).
   • Title examination and title insurance.
   • Special mailing fees for refinancing loans (if cost savings exceed mailing cost).
   • MERS fee.
   • Other fees specifically authorized by VA. These fees must be the actual charge of the third party and cannot be duplicated.
3. VA Funding Fee: A one-time fee paid by most veterans, service members, and survivors who obtain a VA loan. It's a percentage of the loan amount, varying by loan type, down payment, previous VA loan use, and service status. It can be paid at closing or rolled into the loan. Exemptions apply for veterans receiving VA compensation for service-connected disabilities, those who would be entitled to such compensation, and surviving spouses of veterans who died in service or from a service-connected disability. For High Balance Loans in Ginnie Mae programs, the financed VA Funding Fee is netted out when calculating the original principal balance.

Non-Allowable Closing Costs for VA Loans: The VA prohibits veterans from paying certain fees, which must instead be paid by the lender or seller. These typically include attorney fees (in some cases), brokerage fees or commissions, and prepayment penalties.

Financing Closing Costs for VA Loans: For purchase loans, only the VA funding fee can be financed into the loan amount. All other closing costs must be paid at closing.

Refinances

For mortgage refinances, closing costs typically range from 2% to 6% of the loan amount. These costs can sometimes be rolled into the new loan, meaning they are added to the principal balance. This can reduce the out-of-pocket expense at closing but will increase the total amount financed and the interest paid over the loan term.

Disclosure Requirements and Tolerances

Under the Truth in Lending Act (TILA) and Regulation Z (TILA) and the Real Estate Settlement Procedures Act (RESPA), specifically through the TILA RESPA Integrated Disclosure (TRID) Rule, lenders are required to provide borrowers with a Loan Estimate and a HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702 that detail all closing costs. These disclosures help consumers understand the costs associated with their mortgage loan.

The HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702 itemizes costs into two main sections: "Loan Costs" and "Other Costs."

Loan Costs (Closing Disclosure)

This section provides a detailed itemization of charges directly related to the origination and processing of the mortgage loan. It is broken down into three main categories:

1. Origination Charges: Fees charged by the creditor or mortgage broker for originating the loan (e.g., application, underwriting, processing fees, discount points). These are generally subject to Zero Tolerance Fees.
2. Services Borrower Did Not Shop For: Fees for services required by the creditor where the borrower was not permitted to choose their own provider (e.g., appraisal fee if creditor-selected, credit report fee, flood determination fee). These are also generally subject to Zero Tolerance Fees.
3. Services Borrower Did Shop For: Fees for services required by the creditor where the borrower was permitted to choose their own provider from a list provided by the creditor (e.g., title insurance if borrower-selected, pest inspection, survey fee). The sum of these charges, along with recording fees, is subject to 10 Percent Tolerance Fees.

Other Costs (Closing Disclosure)

This section itemizes charges in connection with the mortgage transaction that are in addition to the direct loan costs. These are typically related to the real estate transaction itself rather than the loan origination.

• Taxes and Other Government Fees: Recording fees (subject to 10 Percent Tolerance Fees) and transfer taxes (subject to Zero Tolerance Fees).
• Prepaids: Amounts paid by the borrower at closing that cover periods extending beyond the closing date (e.g., homeowner's insurance premiums, prepaid interest, property taxes, mortgage insurance premiums). These are generally subject to NO Tolerance Limit Fees.
• Initial Escrow Payment at Closing: Funds collected at closing to establish the borrower's escrow account for future property taxes and insurance. These are generally subject to NO Tolerance Limit Fees.
• Other: Various other charges such as real estate brokerage fees, homeowner's or condominium association charges, home warranties, and inspection fees (if not already listed under "Services Borrower Did Shop For"). Any cost that is a component of title insurance services must be itemized.

Tolerance Limits

The TRID Rule establishes specific tolerance limits for how much certain fees can increase between the Loan Estimate and the HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702:

• Zero Tolerance Fees: Generally cannot increase between the Loan Estimate and the HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702. This includes the creditor's or mortgage broker's origination charges, charges for services for which the consumer was not permitted to shop, and transfer taxes.
• 10% Tolerance Fees: The sum of these charges cannot exceed the sum of the amounts disclosed on the Loan Estimate by more than 10 percent. This includes the sum of third-party services for which the consumer was permitted to shop and recording fees.
• No Tolerance Limit Fees: Can change between the Loan Estimate and the HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702 without triggering a new disclosure or waiting period, provided the original estimate was in good faith. This includes prepaid interest, property insurance premiums, amounts placed into an escrow account, and charges for third-party services for which the consumer was permitted to shop and did not choose a provider from the creditor's list.

If a zero-tolerance or 10% tolerance fee increases beyond its limit, it generally triggers a new HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702 and a new Three Business Day Rule (Revised Estimates) waiting period, unless due to a valid Changed Circumstance or Other Triggering Event (TILA-RESPA).

Seller Concessions and Credits

Seller concessions are anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide. These are credits offered by sellers to help cover a buyer's closing costs and can significantly reduce the buyer's out-of-pocket expenses.

What Seller Concessions Can Include:

• Payment of the buyer's VA funding fee.
• Prepayment of the buyer's property taxes and insurance.
• Payment of extra points to provide permanent interest rate buydowns.
• Provision of escrowed funds to provide temporary interest rate buydowns.
• Payoff of credit balances or judgments on behalf of the buyer.
• Gifts such as a television set or microwave oven.
• Other closing costs that are typically negotiable between buyer and seller.

What are NOT considered Seller Concessions:

• Payment of the buyer's closing costs.
• Payment of points as appropriate to the market (e.g., if the market dictates an interest rate with two discount points, the seller's payment of those two points would not be a concession).

Limits on Seller Concessions (VA Loans): Any seller concession or combination of concessions that exceeds four percent (4%) of the established reasonable value of the property is considered excessive and unacceptable for VA-guaranteed loans. Normal discount points and payment of the buyer's closing costs are explicitly excluded from this four percent limit.

Seller Credits and Loan Originator Compensation: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), seller credits are generally considered as the Borrower (Consumer)'s funds. If a Loan Originator receives compensation from seller credits, it is treated as if they received compensation directly from the borrower, prohibiting them from receiving additional compensation from any other party for that same transaction.

Historical Context

Historical data from the Primary Mortgage Market Survey (PMMS) indicates that fees and points for a 30-year Fixed-Rate Mortgage have historically ranged from approximately 0.80 to 2.70, depending on market conditions and the specific week surveyed. These figures represent the average upfront costs associated with securing a mortgage.