Understanding Closing Costs

Avoid surprises! Be prepared for closing costs when it’s time to finalize your loan.

Closing costs (or settlement costs) are the costs associated with the sale of a home or the refinancing of a mortgage. These costs generally range from 3% to 8% of the total loan amount. Usually, the costs are lower with a refinance and, as with a purchase, many of the costs can be rolled into the loan. Although some fees and taxes associated with a purchase are required by law to be paid by the buyer, you may be able to negotiate with the seller to split the cost of others, such as points. The lender may also be willing to negotiate some of these fees. Be sure to comparison shop several lenders. Don’t forget to take advantage of our debt management calculators, which are very helpful in determining the costs of financing a home, including the total cost of settlement. Some typical closing costs are:

  • Property Taxes (Pre-paid Escrow)
    • Pre-paid escrow costs are the pro-rated portion of the funds you will need to have on deposit with your mortgage company so, when it’s time make the annual disbursement, there will be sufficient funds in your escrow account to cover the payments. Mortgage insurance and homeowner’s insurance are also considered pre-paid escrow items.
  • Generally, the annual property taxes are divided over a 12-month period, and you will be required to place two – three months in an escrow account to cover the annual expense. For more information about escrow and other settlement costs, see the U.S. Department of Housing and Urban Development (HUD) Settlement Cost Booklet.
  • Mortgage Insurance (Pre-paid Escrow)
    • This insurance protects the lender in the event you don’t make your loan payments, and the lender is forced to sell the house through foreclosure for less than you still owe. You may be able to finance the cost of certain mortgage insurance policies.
  • If you are putting less than 20% as a down payment, you may be required to take out private mortgage insurance, commonly referred to as PMI. The premiums for PMI vary depending upon the amount, type, and terms of the mortgage. The U.S. Federal Reserve Board (FRB) explains mortgage insurance and more in the FRB Consumer’s Guide to Settlement Costs.
  • If your loan is insured by the Federal Housing Administration (FHA), you will be required to carry FHA Insurance, usually referred to as MIP. There is usually an up-front fee of 2.25% of the purchase price and a monthly fee of .50% for the life of the loan. For more information about mortgage insurance premiums, see HUD’s webpage about FHA Single Family Home Insurance Premiums.
  • Homeowners Insurance (Pre-paid Escrow)
    • The lender will require that you have a policy in effect at the time of closing, and several months’ payments will probably need to be held in escrow. This can also be paid outside of closing (POC). The State of Arizona’s Insurance Department has A Consumer’s Guide to Homeowner’s Insurance as well as an online Homeowner’s Insurance FAQ.