Closing Costs: What First-Time Homebuyers Need to Know Before Closing

Closing Costs: What First-Time Homebuyers Need to Know Before You Get to the Closing Table

In today’s housing market, where affordability is already stretched due to higher home prices and fluctuating interest rates, closing costs can be the difference between moving forward—or stopping the process altogether.

What Exactly Are Closing Costs?

Closing costs are the fees and expenses required to finalize your home purchase.

They are paid at the closing table and cover:

• lender services
• third-party services
• government fees
• prepaid expenses

Think of it this way:

👉 The down payment is your commitment to the lender that you are going to buy the house. It’s your financial skin in the game.
👉 Closing costs make the transaction legal, verified, and complete

Without these steps, the lender would not fund the loan—and ownership would not transfer.

PRO TIP 👉 Closing costs do not include any real estate agent fees – that’s extra!

What You Need to Know Right Away

• Closing costs are real cash required at closing, separate from your down payment
• They typically range from 2% to 5% of the home’s purchase price
• Many fees are negotiable, adjustable, or avoidable depending on your strategy.  Usually, you just have to ask the lender what programs or what fees can be waived, since I’m a first-time homebuyer, for you to earn my business?

John and Susie had saved aggressively for a 10% down payment on a $400,000 home. They felt confident. Until they received their closing disclosure. They needed $11,500 in closing costs. They had two options:

Delay the purchase and keep saving

Reduce the down payment to cover the closing costs

Roll the costs into the loan 

They chose the second option.

But here’s what changed:

👉 Their loan amount increased
👉 Their monthly payment increased
👉 They now had PMI

Not because they made a bad decision…

👉 They didn’t understand how closing costs connected to the bigger picture.

 What Fees Are Included in Closing Costs?

Closing costs are pretty standard nationwide in terms of categories but the amount of each category varies state to state  .

Here are the most common ones:

Loan Origination Fee

A loan origination fee is charged by the lender to process your loan. Typically, a percentage of the loan. You may be able to trade a higher fee for a lower interest rate (or vice versa) so inquire with the banker. 

Appraisal Fee

An appraisal fee if for a third-party professional to complete and submit a report of  valuation for the home.  This report protects the bank.  The professional is hired and prepares a report that confirms the home’s value.  From there the value of the home support the loan.

• Usually a few hundred to ~$1,000
• Sometimes waived depending on loan program

Credit Report Fee

The credit report fee is charged by your lender to pull your credit and, no you can not submit your credit report to have the fee waived however, this is a negotiable fee.

Title Search and Title Insurance

The title search and title insurance  is completed by a third party vendor where by the bank insures the seller can legally sell the property and that there are no liens (money owed) that are tied to the title of the property.  Sometimes when people are sued and they can’t pay the judgement, as an example, a lien is placed on the property.  When the property is sold the judgement is paid.  This process verifies ownership and protects you, the new owner, against past bill from previous property owners.

Additionally, there are two types of title insurance:

• lender’s policy (required)
• owner’s policy (optional—but recommended)

👉 If you skip owner’s title insurance, you risk being financially responsible for ownership disputes later.

Recording Fees

In order to record your deed and the associated mortgage the County requires that you pay a fee to have this service completed.  You do want it completed or you will not show that you legally own the property.

Underwriting Fee

The underwriting fee covers the lender’s review of your financial profile. It’s an extra fee in addition to your loan application fee.

Escrow Fees

If taxes and insurance are escrowed, there may be setup costs. If it is a condo most of the time the bank requires three months of condo fees to be escrowed and at $500 a month you are looking at and extra $1500 plus the set up fees. 

👉 Some lenders allow you to waive escrow—but often at a higher interest rate.

Homeowner Insurance

The homeowner insurance policy fee is not technically part of the closing costs but it does happen right before closing.  The bank will require you insure the property for at least 80% of the value and typically the home insurance policy for one year is paid in full  upfront.  After the first year you can choose to pay it monthly, so talk with your insurance agent. Often times is you bundle auto insurance with the home insurance you will get a better rate.  Lastly, this does not include Flood Insurance which is separate.

Property Taxes

On the day of closing all the bills the seller has incurred are paid – a clean slate, if you will.  Sometimes people pay their property taxes in one lump sum for the year or they pay them quarterly.  So there is an adjustment, usually on that line item and you may see the seller re-imbursed for prepaid property taxes. Technically this is classified as a "lien".

Attorney Fees

Some state use attorney to close the transaction and in other states it the title company. Regardless, whatever entity is preparing the mortgage paperwork, they charge a fee for that service.

Discount Points

Should a bank offer and a buyer choose, discount points is the technical name for the slang term “buy down”.  Buyer sometimes choose to buy down the interest rate.  It’s an optional fee and no you can’t buy down 3 – 4 points. There is a limit as to how much you can “buy a rate down” however usually 1 point = 1% of loan.  

👉 Exercising this option only makes sense if you plan to own the property long enough to break even.

Prepaid Interest

In the old days, everyone closed at the end and beginning of the month – the 31 or the 1^st of the month so that the interest for the loan was calculated monthly.  Now we know that we can calculate the mortgage interest daily so, people can close at a convenient time.  However, because the mortgage payment is due monthly the difference in the number of days you own the property to the date when the first mortgage payment is made is calculated and “pre-paid interest is collected. In simple terms is covers interest from the closing date to month-end.

The other thing you should realize is that a mortgage payment, say you close June 30^th is not due until August 1^st – yet you will get the keys on June 30^th!

Mortgage Survey Fee

A mortgage survey is an independent review of a professional coming to the property to make sure there are not any encroachments, usually sheds, over a property line. 

One time I had a shed on another person’s property and the bank didn’t like that so the options were to, remove the shed, buy the land from the neighbor – which is a whole long story for another time.  Suffice it to say this mortgage survey verifies property boundaries and documents any encroachments.  The bank charges you a fee for this at closing.

Mortgage Broker Fees

Banks are in business to lend money but the banking world has the products available that their Board has approved.  You can use a bank from the three types of lending institutions we have in the United States or there is someone call a mortgage broker and they work for big companies that take your financial profile and find the best type of loan that works best for your lifestyle.  They are not limited by what one particular bank offers.  These mortgage brokers use their knowledge of the loan industry and shop you around for the best loan.  Their services, should you use them charge you a fee at closing for that service.

👉 Mortgage Brokers shop lenders for you—banks sell their own products.

Real Estate Agent Compensation

A few years back the real estate industry was sued and there were a whole lot of things that happened – there are a lot of details for another post but, the landscape has changed from the traditional way, (since the 60’s) real estate agent are compensated.  Traditionally, sellers paid the buyer agent and the seller agent.  The seller still can do that however; more and more sellers are choosing not to pay the buyer agents.  That means that buyers will need to pay their agents and based on US law real estate agent commissions can’t be rolled into the loan so, this “fee” needs to be discussed with the real estate agent handling the transaction.  Commissions in the US are not set – there is not one fee, that would be “price-fixing, which is illegal so, you as a fist time home buyer need to be aware should you engage with the real estate agent you may have to pay a fee for their services.

Also know there are flat fees, percentage fees – many types of compensation structure. Traditionally, fees were a percentage of the sale so a 2% fee on a 400,000 = $8,000.  These fees for this professional are paid only if the home closes but this area, is everchanging so, stay tuned and be aware you may have another expense in addition to the down payment and the closing costs.

Pros and Cons of Closing Costs (What Happens If You Don’t Pay for Certain Services?)

This is where most buyers don’t go deep enough. All these professionals are helping you through the transaction and protecting your interests and while they are doing their job free of charge, up front, in the end no one works for free so, think of it that way.  The bank too is taking the biggest risk and the bank want tot make sure the price paid for the home is equal to the value of the home, there is legal transfer of ownership and they have completed a financial analysis of you that you indeed will pay back the loan.

Pros of Paying Closing Costs Properly

• Ensures legal ownership is clear
• Protects you from future financial risk
• Allows the lender to approve and fund your loan
• Reduces the chance of future disputes or surprises

Cons (Or What Happens If You Cut Corners)

This isn’t really about “saving money.” It’s about what risk you’re taking on.

Skip Owner’s Title Insurance?

👉 You could be responsible for legal costs if ownership is disputed

Skip Appraisal (if allowed)?

👉 You risk overpaying for the property

Roll Costs Into Loan?

👉 Lower upfront cash—but higher monthly payment

Choose Higher Rate to Reduce Costs?

👉 Lower upfront—but more paid over time

 How Closing Costs Connect to Your Bigger Financial Picture

If you aren’t aware these fees exist or don’t plan for them closing costs directly impact:

• Your down payment – you may reduce your down payment
• Your mortgage payment may increase
• Your real estate agent services are also fees outside the closing costs and down payment

First-Time Homebuyer Incentives (What You Should Know)

This is a hot topic – everyone always says Oh – I’m going to get down payment assistance – and there are a ton of searches on-line about that.  It’s great if you qualify, yes then take advantage of it however, there are more first time home buyers who don’t qualify because they either make too much money or the house is too expensive.  We will break down all the ins and out of that in another content piece. As an outline this is the government assistance path

Government & Non-Profit Programs

• Closing cost assistance
• Down payment assistance
• Income-based qualification

 The strings attached typically include:

• income limits
• purchase price limits
• location restrictions
• occupancy requirements

 Private Sector Programs and Incentives

What is available is that banks are competing for your business so, they run specials all the time – this is where you can find good programs.  Banks are in the business of lending money – so, keep your eyes out and see if you see any first-time homebuyer specials and if you do, find out about them.  ASKING, could save you a few thousand dollars. Recognize the private sector trying to gain you as a client and incentives could look something like this:

Lender Incentives

• Reduced fees
• Special programs
• Rate discounts

👉 Always ask—these are not always advertised.

Special Programs by Profession

Some lenders offer benefits for:

• Doctors
• Teachers
• Specific professions

👉 These are niche—but real and they happen all the time so yes ASK!

Grants (After Purchase)

Having administered these programs for many years, these grants are to service low-income household who typically make less than 80% of the area median income.  When you tell people you are going to buy, sometimes people think, oh I’m going to find free money and that’s not usually the case when you are a first-time homebuyer.  These grants we are speaking of are for people that bought a long time ago and they have suffered a financial situation; it could be so many things but often it’s the loss of the main wage earner and the cost of the home to repair it is unattainable.  These programs are limited, but they do help with weatherization and renovation to keep the home habitable. These grants don’t provide “magazine” renovations they are intended to keep a structure habitable.

What to Think About (This Is Where You Become Strategic)

While you learn about Closing costs it’s time to ask yourself some questions

• Do You Understand Your Full Cash Requirement?

Not just down payment it’s the total cash to close.

• Are You Draining Your Reserves?

If closing costs wipes you out then buy something less expensive.

• What Tradeoffs Are You Making?

          Lower upfront vs higher monthly or higher rate vs lower fees.

• Who Is Advising You?

This is critical. You will interact with real estate agents, lenders, attorneys. None of them are responsible for your big picture strategy.

 Building the Right Team (This Is Where We Come In)

At The First Time Homebuyer Workshop, we educate you on the grey area. Yes, AI can explain the steps and define the terms but the human part of the process is in the grey area. You will step back and ask:

👉 “Does this structure actually work for my life?” Not just:

👉 “Can I get this deal done?”

Most first-time homebuyers don’t struggle with effort—They struggle with understanding how everything connects initially.

👉 Start Here “Homebuying Chaos Unwrapped!” (Free Mini-Class)

Inside, you’ll learn:
• Who does what in the homebuying process
• Who runs the homebuying process (Hint: It's not your real estate agent)
• Who helps you with the BIG picture (Hint: It's not the transaction specialists)
This class (40 min) will pull the wool from over your head so you can move forward with clarity—not confusion.

Final Thought

Closing costs are not random, there are multiple professions helping you through the process and these services are not only required by the bank but, it protects you.  They are part of how the entire system works.  The difference is if you understand before you start shopping for a house and a loan hand you will be able to decipher the right path verses the wrong one.

Because once you’re under contract…

👉 You are making decisions under pressure.

What are closing costs in simple terms?
They are payment of professional services that a buyer uses during the home buying process.

How much are closing costs?
Typically 2%–5% of the purchase price.

Can closing costs be negotiated?
Some fees can be reduced, waived, or structured differently.

Can I roll closing costs into my loan?
Sometimes, and if so, the fees will increase our loan and monthly payment.

Do I have to pay closing costs upfront?
Closing Costs are due on the day of closing.

 Disclaimer: This content is intended to educate first time homebuyers and let you know there are options. Discussing the issues with the professionals you hire during your home buying journey is prudent. We are not recommending or advising you on your financial or legal situation

Let’s demolish homebuyer remorse together—one empowered buyer at a time.

 Julie Marion 

Founder of The First Time Homebuyer Workshop, homebuyer educator, Urban Planner, Freddie Mac Credit Counselor, Real Estate Broker, Podcast Host, You Tube Contributor.

www.TheFirstTimeHomebuyerWorkshop.com