Closing costs are one of the first places homebuyers can feel like the numbers are moving around on them. You may hear one estimate early in the process, then see a different number later, and wonder whether something changed or whether you misunderstood it in the first place.
The important thing to know is that "closing costs" often gets used as a catch-all phrase. It may include lender fees, title company fees, appraisal and recording fees, prepaid insurance, prepaid interest, tax escrows, and credits from the seller or lender. Those are not all the same kind of expense.
Loan and lender fees
Loan fees are the charges connected to creating and processing the mortgage. You may see items such as underwriting, processing, credit report, flood certification, or discount points.
Discount points deserve special attention because they're tied to the interest rate option you choose, not just a standard cost of getting a loan. For example, one borrower may choose a slightly higher rate with lower upfront cost. Another may choose to pay points to lower the rate. Both may be reasonable choices, but they produce different closing-cost numbers.
Title company and settlement fees
The title company helps close the transaction, handle the money, record documents, and issue title insurance.
In Texas, title insurance rates are regulated. Your loan amount and home price (for a purchase) or mortgage payoff amount (for a refinance) determine the amount of the title policy fees. On a purchase, you also may see both a lender's title policy and an owner's title policy. Which party pays for what depends on how you negotiate the purchase contract.
Lenders require that you purchase "lender's title insurance" to protect the lender's interest in case of a defect in the title to your property. (Defects are rare, but they could cause you to lose your property in the absence of title insurance.) The lender also requires certain endorsements to the title insurance policy.
The state also requires that title companies collect a State Guaranty Fee for each transaction. Additionally, the title company may charge a fee to manage the transaction (often called an Escrow Fee) as well as for other services it provides.
Third-party and government fees
Some charges go to other service providers involved in the transaction. Common examples include the appraisal, survey, pest inspection, attorney document-preparation fee, and county recording fees. Some of these are known early. Others may not be final until the title company, appraiser, other other provider confirms the amount.
In some cases, you can shop for the service provider, as in the case of a survey or pest inspection. In other cases, it's the lender's choice, such for an appraisal and credit report. (The services for which you can shop are listed in Section C on the Loan Estimate.)
Up-front mortgage insurance
Some loan programs, such as FHA, VA, and USDA, may charge up-front mortgage insurance. Strictly speaking, VA calls its fee a Funding Fee, and USDA calls its fee a Guaranty Fee, but they behave the same as FHA up-front mortgage insurance.
These loan programs allow a borrower to roll the fee into the loan. In that case, you won't pay the fee at closing, but it still appears on the Loan Estimate and Closing Disclosure and gets added to your loan amount.
Some conventional loan programs that require mortgage insurance allow a borrower to pay it at closing as an up-front mortgage insurance fee rather than make it part of the monthly payment.
Prepaid expenses
Prepaids are not really fees. They are costs of owning the home that are paid upfront at closing. The most common examples are homeowners insurance, prepaid interest, flood or windstorm insurance if required, and sometimes property taxes.
Prepaid interest is a good example. Mortgage interest is paid after it accrues as part of your monthly payment - except for the month of closing. You pay the interest for the remaning days in the month you close at closing. That can feel like an extra fee, but it's really the first partial-month interest charge.
Escrow deposits
If your loan has an escrow account, the lender collects money at closing to start that account. That account is then used to pay future property tax and insurance bills.
This is one of the easiest parts to misunderstand. Escrow deposits increase the amount you need at closing, but the money is being set aside for future bills. It is not the same thing as the lender charging another fee.
Other fees
Unfortunately, the lender can't know about non-standard fees associated with a transaction when issuing a Loan Estimate, such as fees charged by your homeowner's association. A good lender will make you aware of them as soon as possible, but they still may come as a surprise.
Credits can reduce the amount due
Seller contributions, lender credits, earnest money, option money, and other credits can reduce the amount you need to bring to closing. That's why two buyers with similar prices and loan amounts may have very different cash-to-close numbers.
The rules for using credits depend on the loan program, the contract, and the source of the credit. It's always better to ask how a credit will be applied than to assume it reduces every part of the closing amount equally.
Where to find the numbers
Early in the process, the Loan Estimate shows an estimate of the costs. Before closing, the Closing Disclosure shows the final or near-final numbers. Those forms are helpful, but they still can be confusing if you don't know what each line represents.
If you're comparing loan options or trying to decide how much money you need to buy a home, ask your lender to walk through the estimate with you. You don't have to memorize every line item. You just need to understand what the major pieces mean and which ones may change before closing.