Home Loan Closing Costs

Any home loan, whether it's to purchase a home or to refinance a current loan — will come with some closing costs. Closing costs cover a variety of fees related to the processing of a mortgage, title work, and required prepaid items like homeowners insurance and property taxes.

When do you pay closing costs?

You pay closing costs at the end of the real estate closing.

One common misconception is homebuyers have to come up with thousands of dollars in upfront and out-of-pocket closing costs. This isn’t always the case.

You also don’t pay them separately from your down payment. After you sign the final loan paperwork, the title company calculates all of the closing costs and adds that to your down payment amount, then subtracts any lender credits or seller-paid concessions. That is the amount you’ll need to hand off to the escrow company. You can either wire the money or bring a cashier’s check with you at the final real estate closing.

What is considered a closing cost?

Below is a list of the most common closing cost description and approximate costs. Everyone’s situation is different. The best way to get an accurate estimate of your loan’s costs is after your mortgage application is processed, and you receive an itemized closing cost sheet from your lender. Here is a typical estimated closing cost for a $250,000 conventional loan. Closing costs are based on your loan type, loan amount, and geographical area; your costs will likely look different.

Item                       Fee
Loan origination    $2,500    (1% of the loan amount)
Discount fee          $625       (0.25%)
Processing fee       $450    
Underwriting fee    $500    
Wire transfer          $50    
Credit report          $35    
Tax service              $50    
Flood certification  $20    
Title insurance        $550    
Escrow/signing       $450    
Courier fee              $20    
Appraisal                 $450    
Recording               $110    
Homeowners insurance (1st year)    $700    
Property tax reserves (6 months)      $1,500    
Estimated Total       $7,985    (3.2% of the loan amount)

Pre-paid Closing Costs

In addition to lender and title closing costs, there are also pre-paid costs also called prorations. Prorations are credits between the buyer and seller at closing that ensure each party is only paying these costs for the time that they owned the home. They will show up as debits or credits on each party's closing statement.

For instance, if the seller has already paid property taxes in advance for the year, the buyer will need to credit a prorated portion of those taxes back to the seller for the remaining days of the year in which the seller will no longer own the home. This prorated amount will show up as a credit on the seller's closing statement and a debit on the buyer's closing statement.

Types of Prorations

There are various fees and expenses that might be prorated at a real estate closing. Here are some of the most common ones.

Real Property Tax Prorations:

Property tax calendars vary by state and municipality. Some states collect property taxes in advance, some collect in arrears, and some collections depend on the time of year. What's most important at this juncture is whether your closing period involves prepaid taxes. If the taxes are prepaid, and you are the seller, you will receive a credit. If the taxes are prepaid, and you are the buyer, you will be charged.

Mortgage Interest Prorations:

Unlike rent, which is paid in advance, mortgage interest is paid in arrears. When you pay a mortgage payment on January 1, for example, it pays the interest for December. On a new mortgage loan, lenders want to collect interest up to 30 days before the first mortgage payment is due, so if you close on, say, November 15, your first mortgage payment will be due January 1. As the borrower, you will be charged 15 days of interest on your closing statement, from November 15–30.

Homeowner Association Dues Prorations:

If a seller has not yet paid homeowner association dues, they will be paid from the seller's proceeds, and the seller will receive a credit for the unused portion. For example, if the dues are $300 a month, the daily proration is $10. When a transaction closes on the 10th of the month, the seller will be charged 10 days of HOA dues ($100). The buyer will pay $200 for the remaining 20 days of HOA dues.

Insurance Prorations:

Insurance premiums are paid in advance, and buyers typically take out a new hazard insurance policy when buying a home. However, if the buyer is assuming the seller's existing loan or buying on a land contract, they might ask the seller to transfer the existing insurance policy. Fire insurance policies generally transfer with or without consideration. "With consideration" means the seller will be reimbursed for the period they will not own the property, and "without consideration" means there will be no prorations. Most buyers obtain a new policy.

Utility Prorations:

It is not often that utilities are prorated at closing, but prorations do apply to certain municipalities. In most cases, the utilities roll over to the tax assessments and are deducted from the tax bill for prorations. The buyer is then credited against future tax bills. You will see this situation happen in short sales and foreclosures because if the seller isn't making the mortgage payments, they are probably not paying the utility bills. Also, a buyer needs to credit a seller if they have a property with a propane tank for any gas remaining.

Rental Income Prorations:

Rent is generally paid in advance. Buyers who purchase an investment property expect to receive a credit for that portion of the rent, which covers the period the buyer will own the property. A sale that closes on November 15, involving a tenant-occupied property that rents for $1,000 a month, would result in the buyer receiving credit for 15 days of prepaid rent ($500). The seller would receive a debit of $500. Security deposits held by the seller are also transferred to the buyer as a credit to the buyer and a debit to the seller.