Closing costs explained: what a home buyer pays at closing in the United States

Closing costs on a home purchase in the United States are the charges paid to complete the loan and the transfer of the property: the lender's fees, the third-party services the lender requires, title and settlement charges, government recording fees and taxes, and the amounts collected in advance for insurance, interest and property taxes. They come on top of the down payment, and the federal mortgage forms list them in lettered sections that add up to one line, Total Closing Costs.

This article covers a home purchase financed with a mortgage in the United States, under the federal disclosure rules the Consumer Financial Protection Bureau (CFPB) administers. It is general information, not legal, tax or mortgage advice; transfer taxes, title customs and who pays what change from one state to the next, and amounts are in US dollars.

Two documents carry the numbers. The Loan Estimate arrives soon after you apply and gives the lender's estimate of every charge; the Closing Disclosure arrives at the end and gives the final figures. Both use the same page 2, with the same sections in the same order. The worked example below follows one illustrative purchase from the first section to the last line.

What are closing costs, and what are they not?

Closing costs are the fees and charges a home buyer pays to obtain the mortgage and take title, and they are separate from the down payment, which is the part of the price the buyer pays from their own funds. The CFPB's guide to the Closing Disclosure describes Total Closing Costs as the upfront loan and transaction costs, excluding the down payment, and warns that this total is different from the amount of money to bring to closing.

Three amounts are confused all the time.

The down payment is equity. It is part of the price of the home, it reduces the loan, and it appears on page 3 of the forms, never among the closing costs.

The closing costs proper are fees for work done and for taxes owed: underwriting the loan, valuing the property, searching and insuring the title, running the settlement, recording the deed and the mortgage.

The prepaid items and the initial escrow payment sit in between. The federal forms count them inside Total Closing Costs, yet they are not fees: they are your own insurance premium, your own first days of loan interest and your own property taxes, paid early. A buyer comparing two lenders should set these lines aside, because they depend on the home, the insurer and the closing date far more than on the lender.

Cash to close is a fourth figure, the only one that leaves your bank account on closing day: closing costs plus the down payment, less what has already been paid or credited.

How do the Loan Estimate and the Closing Disclosure group closing costs?

The Loan Estimate and the Closing Disclosure split closing costs into Loan Costs (sections A, B and C, totalled in D) and Other Costs (sections E, F, G and H, totalled in I), and Total Closing Costs in section J is D plus I, less any lender credits. That layout is set by the CFPB's Regulation Z and is the same for every lender.

Section A is the lender's own price. The CFPB's guide to the Loan Estimate lists the fees found there (application, origination, underwriting, processing, verification and rate-lock fees) and adds that it is the total that matters. Points, if any, are itemised here as a percentage of the loan and a dollar amount.

Section B holds services the lender requires and chooses the provider for. Upfront mortgage insurance premiums and the funding fees of government-backed loan programs are disclosed here as well, according to the same CFPB guide.

Section C holds services the lender requires but lets you buy from a provider of your choice. The lender must give you a written list of providers; you may use one of them or bring your own, after checking with the lender.

Section H collects what is neither required by the lender nor a tax. The regulation requires the word "optional" at the end of the line for separate insurance and warranty products shown there, which is how an owner's title insurance policy that the lender does not demand is usually labelled.

What is the difference between prepaids and the initial escrow payment?

Prepaids are amounts paid at closing for bills that fall due before the first monthly payment, while the initial escrow payment is the opening deposit in the account the loan servicer will use to pay future tax and insurance bills. Neither is income for the lender.

Section F usually carries two lines. The first is the homeowner's insurance premium: according to the CFPB, a buyer usually pays the first 6 to 12 months of premium at or before closing, and the insurer, which you choose, sets the amount. The second is prepaid interest, which the CFPB describes as the interest from the closing date to the end of that month. A closing early in the month means more days of prepaid interest; a closing late in the month means fewer.

Section G funds the escrow account, where the lender has you maintain one. Each month, part of your payment goes into that account, and the servicer pays the property tax and insurance bills from it. Because a bill may fall due before enough monthly deposits have built up, the servicer collects a starting balance at closing. The CFPB's Regulation X limits it: the servicer may collect enough to cover the charges accrued since they were last paid, plus a cushion no greater than one-sixth of the estimated total annual payments from the account, which is two months' worth.

Sections F and G can therefore add up to a large share of Total Closing Costs without telling you anything about whether a lender is expensive. In the worked example further down they make up about 40% of the total.

Which closing costs can change between the Loan Estimate and closing?

Between the Loan Estimate and closing, a lender's own fees, required services the borrower could not shop for and transfer taxes cannot increase, recording fees and required services from the lender's list can increase by up to 10% in total, and prepaids, escrow deposits and services the borrower chose freely can increase by any amount. Those are the three groups the CFPB sets out; the first two hold unless a changed circumstance permits a revised estimate.

In practice, sections A and B and the transfer tax line of section E are fixed from the day of the Loan Estimate.

The 10% limit applies to the group as a whole, not to each line: one fee may rise by a quarter while another falls, as long as the sum stays within 10% of the sum estimated. The CFPB notes one exception: if the listed provider is an affiliate of the lender, the cost cannot change at all.

The group with no limit covers prepaid interest, property insurance premiums and initial escrow deposits; required services bought from a provider that is not on the lender's list; and services the lender does not require. No limit does not mean no standard: under Regulation Z these estimates must be consistent with the best information reasonably available to the lender at the time.

A changed circumstance reopens the estimate. The CFPB gives examples: you chose a different kind of loan or changed the down payment, the appraisal came in higher or lower than expected, a new loan or a missed payment changed your credit, or the lender could not document part of your income. Under Regulation Z, the lender then has three business days from receiving the information to issue a revised Loan Estimate.

If a charge ends up above its limit with no valid revision, the CFPB states that the borrower is entitled to a refund of the excess; Regulation Z gives the lender up to 60 days after closing to pay it. A short illustration: suppose the 10% group was estimated at $2,950 and comes to $3,340 at closing. The ceiling was $3,245, so $95 comes back to the borrower.

What does a buyer pay, and what does a seller pay?

On a typical United States sale the buyer pays the costs of the loan and of taking title, and the seller pays the costs of delivering clear title and of selling, but the contract and local custom decide the detail. The CFPB puts the general rule simply: buyers generally pay the costs of a home purchase, and a seller may cover some of them depending on the contract or on state law.

The seller's side has its own arithmetic. From the sale price come the payoff of the seller's existing mortgage (a debt, not a cost), the commission the seller agreed to, the seller's share of title and settlement charges, any transfer tax the law puts on the seller, and any credit promised to the buyer. The seller's costs come out of the proceeds, so the seller rarely brings money, while the buyer's costs must be funded in cash or through the loan.

One more line shifts money between the two parties without being a cost to either: prorations. If the seller has already paid a property tax bill that runs past closing, the buyer reimburses the seller for the days after closing; if the bill is unpaid and covers days when the seller still owned the home, the seller credits the buyer. These adjustments appear on page 3 of the Closing Disclosure, not among the closing costs.

How is cash to close calculated, step by step?

Cash to close equals Total Closing Costs, minus any closing costs financed in the loan, plus the down payment, minus the deposit already paid, minus seller credits, plus or minus adjustments and other credits. That is the order of the Calculating Cash to Close table that Regulation Z places on the Loan Estimate, with one further line, funds for the borrower, that is normally zero on a purchase.

Take an illustrative purchase, with every number chosen for the example and none of them a market average. The price is $420,000. The buyer puts 10% down, $42,000, and borrows $378,000 at 6.5% over 30 years. An earnest money deposit of $8,000 was paid when the contract was signed. The seller agreed to a $5,000 credit towards closing costs. Closing falls on the 12th of a 30-day month. Homeowner's insurance costs $1,560 a year, $130 a month, and property taxes are $4,200 a year, $350 a month.

Prepaid interest is the one line that needs a calculation. One day of interest on $378,000 at 6.5% is $378,000 × 0.065 ÷ 365, or $67.32. From the 12th to the 30th inclusive there are 19 days, which gives $1,279 once rounded to the dollar.

Total Closing Costs of $11,359 come to 2.7% of the $420,000 price. Split the way the first section of this article suggests, $6,860 of that is fees and government charges (sections A, B, C, E and H) and $4,499 is the buyer's own insurance, interest and taxes paid ahead (sections F and G).

The buyer in this example brings $40,989, which is less than the $42,000 down payment even though closing costs exceed $11,000. The deposit and the seller credit together, $13,000, more than cover the closing costs and the tax adjustment, which add up to $11,989. Without the seller credit, the same buyer would bring $45,989.

As for how the money moves, the buyer sends cash to close to the settlement agent, usually by wire or cashier's check according to the CFPB, and the lender sends the loan funds to the same agent. The agent then pays each provider, authority and party from the settlement figures, a process other articles on this site describe line by line.

How can a buyer reduce closing costs?

A buyer can reduce closing costs in three ways: by comparing lenders and shopping for the services in section C, by negotiating a seller credit, and by accepting a lender credit in exchange for a higher interest rate. The first lowers the real cost; the other two, as the CFPB points out, usually move the cost somewhere else.

Shopping comes first because it is the only reduction with nothing to give back. Ask several lenders for a Loan Estimate on the same loan, the same day if possible, and compare section A as a total and section B as a total. Then take the lender's written list for section C and ask for quotes on title and settlement services. A provider from the lender's list falls under the 10% limit, while your own provider is outside it, so get that quote in writing.

A seller credit lowers cash to close dollar for dollar, as step five of the example shows. The CFPB's caution is that a seller who gives a credit usually raises the price to cover it; where that happens, the buyer has financed the closing costs through a larger loan. Loan programs also limit how much a seller may contribute, so ask the lender for the limit that applies to your loan before writing a credit into an offer.

A lender credit works like points in reverse. According to the CFPB, points lower the interest rate in exchange for paying more at closing, one point costs 1% of the loan amount, and lender credits lower the closing costs in exchange for a higher rate. The credit appears as a negative number on the Lender Credits line of section J. How much rate a credit costs differs from lender to lender and from day to day, so the figures below are an assumption made for the example.

Suppose the lender of the example offers a credit of 0.5% of the loan, $1,890, if the buyer accepts 6.625% in place of 6.5%. The monthly payment of principal and interest rises from $2,389.22 to $2,420.38, which is $31.16 more each month. Dividing $1,890 by $31.16 gives about 61 months: a buyer who sells or refinances before roughly five years comes out ahead with the credit, and one who keeps the loan longer pays more than the credit was worth. The CFPB's advice is to compare offers with the same points or credits from each lender, and to ask for the loan with and without them.

The other levers are smaller. Closing near the end of the month cuts the prepaid interest line, at the price of a first full payment arriving sooner. Shopping for homeowner's insurance lowers both the prepaid premium and the escrow deposit.

How much do closing costs come to on average?

There is no single reliable average for closing costs, because published figures count different sections; the firmest official number is the CFPB's finding that median total loan costs on home purchase loans were $6,684 in 2023. That figure comes from the Bureau's report on 2023 mortgage market activity, based on the data lenders file under the Home Mortgage Disclosure Act.

Read what it measures before using it. Total loan costs are section D of the form: origination charges, the services a borrower cannot shop for and the services a borrower can shop for, with points included where they were paid. The figure leaves out everything in Other Costs, so a buyer's Total Closing Costs in section J will sit above it, sometimes far above in a state with a high transfer tax or high property taxes.

The same caution applies to any percentage of the purchase price. In the worked example, the loan costs are $5,780, the fees and government charges together are $6,860, and Total Closing Costs are $11,359: three defensible answers to the same question, for the same purchase. Whenever a figure is quoted, ask which of the three it is.

Your own Loan Estimate is a better guide than any average: it is built on your price, your loan and your county, and it must reach you no later than the third business day after the lender receives your application, according to Regulation Z.

What should you check when the Closing Disclosure arrives?

When the Closing Disclosure arrives, compare its page 2 with the latest Loan Estimate section by section, confirm that every credit you negotiated appears, and question any new line before closing day. The lender must make sure you receive the document no later than three business days before closing, and the CFPB advises using that time to resolve problems.

• Sections A and B: no line should be higher than on the latest Loan Estimate, and no new fee should have appeared, unless a revised estimate explains it.
• Section C and recording fees: with providers from the lender's list, the final sum should be no more than 10% above the estimate.
• Sections F and G: check the insurance premium against your insurer's invoice, the days of prepaid interest against the closing date, and the months placed in escrow.
• Section H: each line is something you asked for.
• Section J: the lender credit, if you agreed one, appears as a negative number.
• Page 3: the seller credit, the deposit and the tax adjustments. The CFPB notes that a seller's contribution may appear as a seller credit on page 3 or as seller-paid amounts beside individual lines on page 2.
• Page 1: loan amount, rate, monthly payment and whether there is a prepayment penalty.

A correction to a fee does not by itself restart the three-day period. Regulation Z requires a new three-business-day wait in only three cases: the annual percentage rate becomes inaccurate, the loan product changes, or a prepayment penalty is added. Other changes lead to a corrected Closing Disclosure without a new wait.

Raise questions with the lender for anything in the loan costs and with the settlement agent for title, recording and proration lines. The CFPB says the same to borrowers who find an error in closing documents: contact the lender or the settlement agent to have it corrected immediately.