Closing Costs Explained: What They Are and How to Prepare

You saved your down payment. Then your Closing Disclosure arrives with thousands of dollars in fees you were not expecting. Closing costs catch many first-time buyers off guard.

Freddie Mac suggests being prepared for closing costs of 2-5% of the purchase price. They include lender fees, title and escrow fees, government fees (recording, transfer taxes), and prepaid items (homeowners insurance, prepaid interest, and the opening deposit for your escrow account). California counties charge a documentary transfer tax of $1.10 per $1,000 of the price, and some cities add more. Who pays it is set by local custom and your contract. Your lender must give you a Loan Estimate within 3 business days of your application.

Lender origination fees are sometimes negotiable — especially if you are comparing multiple lenders. You can usually shop for title and settlement services. Government fees and transfer taxes are fixed, though your contract can set who pays them. You can also ask for seller concessions, where the seller pays part of your closing costs, within your loan program's limits.

Budget for closing costs on top of your down payment, and use your Loan Estimate's figures once you have it. You must receive your Closing Disclosure at least 3 business days before signing. Compare it to your Loan Estimate: the lender's own fees and transfer taxes generally cannot increase, recording fees and services chosen from the lender's list cannot rise more than 10% in total, and items like prepaid interest and insurance can change. Ask about anything that looks wrong.

• ✓Freddie Mac suggests preparing for closing costs of 2-5% of the purchase price, on top of your down payment
• ✓You can shop for title services and negotiate some lender fees
• ✓In California, expect a documentary transfer tax; your contract and local custom set who pays it
• ✓Compare your Loan Estimate to your Closing Disclosure — some fees cannot rise at all, others only 10% in total