Closing costs explained

The down payment is only part of the cash required to buy a home. Closing costs combine lender charges, third-party settlement services, government recording fees, and amounts collected in advance for taxes and insurance. Together they can add 2% to 5% of the loan amount — sometimes more — on top of your down payment. Understanding each category helps you budget accurately and compare lender offers without surprises at the signing table.

Loan and lender charges

Origination, underwriting, processing, and application fees compensate the lender for evaluating and approving your mortgage. Discount points — prepaid interest that lowers your rate — also appear in this section if you choose to buy them down.^[3] Compare these charges on official Loan Estimates from each lender; labels and pricing structures differ even when the underlying services are similar.^[2]

The CFPB’s closing guide walks through each section of the disclosure forms so you know what you are paying and why.^[1] Use the closing costs calculator to estimate total cash needed based on your loan amount, location, and fee assumptions.

Third-party and settlement services

Appraisal, credit report, title search, title insurance, settlement or escrow agent fees, survey, and recording charges go to outside providers. Some services can be shopped — title insurance is a common example in many states — while others are selected by the lender or governed by local custom. Title insurance protects against defects in ownership records; lender’s title policy is typically required, and owner’s coverage is optional but often recommended.

Home inspection fees are usually paid before closing and may not appear on the final disclosure, but they are part of the total cost of buying a home.

Prepaids and escrow reserves

At closing, lenders often collect homeowners insurance premiums, property tax installments, and daily mortgage interest from the closing date to month-end. Escrow reserves — sometimes called impounds — prefund future tax and insurance bills the servicer will pay on your behalf. These are not always fees in the economic sense, but they still increase cash needed on closing day.

Escrow requirements vary by loan type and lender. FHA and conventional loans with less than 20% down often require escrow accounts; some conventional borrowers with larger down payments may waive escrow for a fee.

PMI, credits, and cash to close

Private mortgage insurance may require an upfront premium at closing in addition to monthly charges when your down payment is below 20%.^[4] Seller credits and lender credits can offset eligible closing costs, usually negotiated through purchase price or a higher interest rate. Credits are restricted by loan program rules and generally cannot become cash back beyond permitted tolerances.

Compare how credits affect your rate and long-run cost in our mortgage points guide and the mortgage points calculator.

Budgeting beyond the down payment

Under-budgeting closing costs is a common reason buyers scramble for cash late in the process. Request Loan Estimates from multiple lenders early, and compare the “cash to close” figure on each disclosure — not just the rate. The home affordability calculator helps connect income, debts, down payment, and payment targets before you shop. The mortgage payment calculator verifies principal and interest on the loan amount you are financing.

Review your Closing Disclosure at least three business days before signing. Compare it line by line to the Loan Estimate and ask your lender to explain any changes. Closing costs are negotiable in some areas — especially seller-paid credits and shoppable services — and worth questioning before you commit.