Closing Costs Explained: What You Pay and Why

When you are saving to buy a home, it is natural to focus on the down payment. But there is another category of expenses you will need to plan for: closing costs. These are the fees and prepaid items involved in finalizing your loan and transferring ownership. Understanding what they are and why they exist helps you budget accurately and avoid last-minute surprises.

What Closing Costs Include

Closing costs vary depending on your location, loan type, purchase price and the providers involved. They generally fall into a few groups.

Lender-related charges

• Origination or underwriting fees: Charges for processing and approving your loan
• Discount points: Optional fees you can pay to lower your interest rate
• Credit report fee: The cost of pulling your credit

Third-party services

• Appraisal: An independent estimate of the home’s value, required by most lenders
• Title search and title insurance: Confirms the seller has the right to sell and protects against certain ownership claims
• Survey: Required in some areas to confirm property lines
• Settlement or attorney fees: For the professional who handles the closing

Government fees

• Recording fees: To record the deed and mortgage with the local government
• Transfer taxes: Charged by some states and counties when property changes hands

Prepaid items and escrow deposits

• Your first year of homeowners insurance
• Interest from your closing date to the end of that month
• An initial deposit into your escrow account for future property taxes and insurance

Some loans have their own program-specific charges too. FHA loans include an upfront mortgage insurance premium of 1.75%, which is usually added to the loan amount, and most VA borrowers pay a funding fee.

Closing Costs vs. Cash to Close

These two terms are easy to mix up. Closing costs are the fees and prepaid items described above. Cash to close is the total amount you need to bring on closing day, which includes your down payment and closing costs, minus any deposits you already paid, seller credits or other adjustments. Your Closing Disclosure shows both figures clearly.

Where to Find Your Numbers

You will not have to guess. Shortly after you apply, your lender must give you a Loan Estimate that lists your expected rate, monthly payment and closing costs. Use it to compare offers from different lenders on an apples-to-apples basis.

At least three business days before closing, you will receive a Closing Disclosure with your final figures. Compare it line by line with your Loan Estimate and ask your loan officer about any changes.

Ways to Manage Closing Costs

1. Budget early: Ask your loan officer for an estimate of closing costs as soon as you start planning, and save for them alongside your down payment.
2. Shop for services where allowed: Your Loan Estimate will show which services you can shop for, such as title or survey providers.
3. Negotiate seller credits: Depending on the market and your contract, the seller may agree to cover some of your closing costs.
4. Look at your options for points: Paying points raises upfront costs but lowers your rate. Skipping them does the opposite. Choose based on how long you plan to keep the loan.
5. Ask about assistance: Some buyers may qualify for programs that help with down payment or closing costs.
6. Time your closing: Closing later in the month can reduce the prepaid interest due at closing, though it does not change your total cost of borrowing.

Plan With Confidence

Closing costs are a normal part of buying a home, and with a little planning they do not have to be stressful. Use our mortgage calculator to estimate your payment, explore our low down payment options, and talk with a FLO Mortgage loan officer for a personalized estimate of what to expect.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.