What Are Closing Costs? Your Essential Guide

Published on November 15, 2017

– 4 min read

If you’re a first-time home buyer, it’s natural to have questions about several aspects of the mortgage process, including, “What are closings costs?”

These fees can have a significant impact on your home-shopping budget, so let’s jump into the details. We’ll cover several key questions, such as what is included in closing costs and who pays them.

What are closing costs?

Closing costs include the expenses and fees necessary to “close” (or finalize) your real estate transaction and mortgage loan. Closing costs are a component of the “total funds needed to close” or “cash to close” figure, which also reflects items like your down payment, earnest money deposit and credits received.

What is included in closing costs?

Closing costs are typically divided into two primary buckets: Loan costs and other costs.

  • Loan costs are then broken down into three sub-categories:
    • Origination charges, including application and processing fees, are costs paid to the lender for extending credit. Clara currently waives its origination fees for online applications.*
    • Services you cannot shop for, include costs for appraisal, credit reporting, flood determination, lender’s attorney charge (if applicable) and tax status research.
    • Services you can shop for, include costs for various inspections and title services among others.
  • Other costs are sub-divided into four categories:
    • Taxes and other government fees, like recording costs and transfer taxes.
    • Prepaids, including homeowner’s insurance premium, prepaid interest, property taxes and mortgage insurance premium (if applicable).
    • Initial escrow payment at closing¸ for home buyers who are placing money into an impound or escrow account.
    • Other, which can include owner’s title insurance fees.

Who pays closing costs?

While the seller can pay for some of the fees, the buyer usually shoulders the lion’s share of the burden. The split is typically made according to customary practices in your particular area, although the split sometimes can be negotiated. In San Francisco, for example, the buyer usually pays for title charges while the seller covers the county and city transfer taxes.

How much are closing costs?

Closing costs can vary considerably depending on the type of loan you choose and where the home is located. Estimates range from 2% to 5% of the home’s purchase price. If you’re looking to reduce closing costs, focus on finding competitive prices for the services you can shop for. You can also aim to close at the end of the month to cut down on the amount of prepaid interest you’ll have to cover.

If you’re early in the home-buying process, a closing cost calculator can help you approximate fees. When you start the mortgage process, your lender will provide you with a Loan Estimate, which includes estimated total closing costs for the loan. In addition, you’ll receive a Closing Disclosure at least three business days before closing, which will detail all final closing costs and specify who pays what amounts.

At Clara, we have a flat origination fee of 1% of the loan amount, but we currently waive it for online applications.

Ready to start house hunting? Clara can help you shop with confidence! Chat with one of our licensed Loan Specialists or get your personalized rate quote in 3 minutes.

*1% Fee Waiver Terms: Each applicant must have a unique email address. Loans subject to underwriter review, credit, and property approval. Promotion subject to change or termination without notice. The loan must close within 120 days of your application date.

Steven Fung
Steven Fung is a licensed Loan Specialist at Clara with over 17 years of experience. When he doesn’t have his mortgage hat on, he enjoys repairing old cars and working on home improvement projects.
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