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What are closing costs?

It would be simple to say “closing costs” are the amount of money required to be brought to the closing table at the time of purchase or refinance. Oh that it were that simple yet it is not. In fact different agencies and organizations have different definitions for the same term. Perhaps we can do some good here and provide the true definition for the components of closing costs, establish which costs go where and which costs are negotiable.

If you want to say closing costs are the total fees you bring to the closing table that would include this list and maybe more in some cases:

1. Appraisal fee – to the appraiser
   

   Pie Chart of Closing Costs

2. Credit score fee – to the credit bureau
3. Origination fee – to the loan officer
4. Funding fee – to the lender
5. Underwriting fee – to the lender
6. Processing fee – to the processing company
7. Broker fee – to the mortgage broker (if there is one)
8. Recording fee – to the county courthouse
9. Loan registration fee – to the state department of banking and finance
10. Title exam – to the title company/private investigator
11. Attorney fee – to the closing attorney
12. Attorney’s wire fee – to the attorney
13. Lender’s title insurance – to the title insurance company
14. Owner’s title insurance – to the title insurance company
15. Real estate taxes and escrow – to the state, county, city where due
16. Home owners insurance – to the owner’s insurance company
17. HOA fees – to the HOA/COA

Some of these fees are only closing costs because the lender, unless the borrower chooses to waive escrows of taxes, insurance and HOA, would be required to be paid over time anyway. In fact most HOAs require an initiation fee even if you are paying cash. That is the best way to think of closing costs as associated with purchasing a home anyway: which fees would exist even if there were no lender: attorney fees, recording fees, appraisal fee, home owner’s insurance, etc.

Two of the biggest fees associated with the purchase of a home are not considered closing costs and those are the down payment and the real estate broker fees. Brokerage fees are not considered a closing cost because they are added to the sales price and the seller pays them and down payment is going straight to the purchase of the home. If we counted down payment as a closing cost then someone paying cash would be considered to be paying 100% closing costs.

What about “no closing costs” loans? Simple. They don’t exist. The buyer or home owner who is refinancing pays the costs either in cash, from the proceeds of the loan, using a down payment assistance program, or by the lender increasing the rate enough to earn more in interest. None of those closing costs go away when they are required. The attorney doesn’t work for free, the appraiser doesn’t work for free, the loan officer, processor and underwriters do not work for free.

Hopefully understanding these fees and where they go will help you in your next purchase or refinance to understand the cost and how to better manage or prepare for your closing.

*The set of closing costs used for this chart are typical for a mortgage broker. They will vary from state to state and lender to lender … but not by much.

Related articles

• Good-faith estimates bring higher closing costs (sfgate.com)
• Survey: Mortgage closing costs 37% higher (usatoday.com)
• New rules limit too-low estimates of closing costs (knoxnews.com)
• What are “seller concessions”? (kennycook.com)

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