Closing Costs Guide: What They Include & Who Pays

What Closing Costs Include

Closing costs are the bundle of fees, taxes, and prepaid items that change hands at the close of a mortgage. They fall into roughly six categories:

1. Lender fees. Origination fee, application fee, underwriting fee, processing fee. The exact items vary by lender; the total typically runs 0.5-1.5% of the loan amount.
2. Third-party fees. Appraisal, credit report, flood certification, settlement agent / attorney, title search, title insurance (lender's policy and optional owner's policy), survey if required, pest inspection if required.
3. State and local fees. Recording fees (typically $50-300), transfer taxes (varies by state and county; ranges from zero to over 1% of sale price), state-specific fees (e.g., Florida documentary stamp tax, intangible tax).
4. Prepaids and escrow. Prepaid interest from closing date to month-end, property tax escrow (typically 2-6 months reserve depending on closing date), homeowners insurance (first year premium typically paid at closing plus an escrow reserve), flood insurance if required, mortgage insurance reserve if escrowed.
5. Discount points (optional). Each point is 1% of loan amount and buys down the rate. Optional, paid at closing if elected.
6. Reserves. Lender-required cash reserves held after closing (typically 0-6 months PITIA depending on program and program). These are not paid to anyone — they are simply funds the lender requires you to have remaining.

Who Pays What: Buyer vs Seller

Customarily, the buyer pays the lender-related and most third-party fees (because the loan is the buyer's), and the seller pays the real estate commission and state-specific seller charges. But customs vary by state, and most items are negotiable in the purchase contract. The general framework:

1. Buyer typically pays: Lender fees (origination, underwriting, processing), appraisal, credit report, lender's title insurance policy, owner's title policy in some states, settlement agent / attorney (in some states), prepaid interest, property tax escrow, first-year homeowners insurance, mortgage insurance reserve, recording fees on the buyer's documents.
2. Seller typically pays: Real estate commission (typically 5-6% of sale price, split between buyer's and seller's agents — though commission structures are evolving following recent industry settlements), seller's attorney fees in some states, owner's title policy in some states (this varies by state), transfer taxes in some states, payoff of any existing mortgage and lien-removal fees.
3. Negotiable: Almost everything in the purchase contract is negotiable. Sellers can offer concessions toward the buyer's closing costs (subject to program caps), buyers can offer to pay seller-customary items in a competitive market, transfer taxes may be split, attorney fees may be paid by either party depending on local custom.

State-by-State Variation

Closing costs vary substantially by state because of three main drivers: title insurance pricing structure (regulated in some states like Florida and Texas, more market-based in others), state-and-local transfer taxes (ranges from zero in some states to over 1% in others), and customary practices (in attorney-state versus title-company-state).

States in our licensing footprint:

1. Florida. Title insurance is regulated and pricing is largely set by Florida statute. Documentary stamp tax on the deed ($0.70 per $100 of consideration), documentary stamp tax on the note ($0.35 per $100 financed), intangible tax ($2 per $1,000 of mortgage). Typical buyer closing costs in Florida run on the higher side of the national range. Florida is a title-company-closing state (no attorney required).
2. Texas. Title insurance is regulated, with rates set by the Texas Department of Insurance. No state-level transfer tax. Title agents handle closing. Section 50(a)(6) cash-out refinances have specific fee caps that affect the closing cost stack.
3. Tennessee. Title insurance is less heavily regulated. Tennessee has a modest recordation tax (state and county). Closings are handled by either title agents or attorneys. Closing costs in Tennessee tend to be middle-of-pack.
4. South Carolina. Attorney-closing state — a South Carolina attorney must conduct the closing. State deed-recording fee is modest. Title insurance is required for all financed transactions.
5. Colorado. Title insurance is competitively priced. Colorado has no state-level transfer tax (some local jurisdictions have small ones). Most closings are handled by title companies; some by attorneys.

Reading the Loan Estimate (LE)

The Loan Estimate is a standardized federal disclosure document that all mortgage lenders must provide to applicants within three business days of receiving a complete application. It is a three-page form that breaks down the proposed loan terms, projected payments, and itemized closing costs. The LE is designed to be directly comparable across lenders — apples-to-apples comparison is the principal point of standardization.

Page 1 of the LE shows the loan terms (loan amount, interest rate, monthly P&I, mortgage insurance, total monthly payment) and a projected-payments table showing how the payment will change over the life of the loan. Page 2 itemizes the closing costs (Loan Costs Section A through C, Other Costs Section E through H, total closing costs at the bottom, total cash to close at the very bottom). Page 3 shows the APR, comparison metrics (5-year total cost), and contact information.

Items that cannot increase between LE and Closing Disclosure: lender's own fees (origination, underwriting, processing). Items that can increase by up to 10% in aggregate (the 10% tolerance bucket): third-party services where the lender selected the provider (excluding appraisal). Items that can change without limit: services where the borrower shopped, prepaids, escrow, and items outside the lender's control. The Loan Estimate is binding on the lender for the lender's own fees within tight tolerances.

Reading the Closing Disclosure (CD)

The Closing Disclosure is the final accounting of the loan terms and closing costs, delivered to the borrower at least three business days before closing (the 'three-business-day rule'). The CD follows the same format as the LE so you can compare side-by-side.

Compare the CD against the LE before closing. Lender fees should match exactly (subject to zero tolerance). The 10% tolerance bucket items should be within 10% in aggregate of the LE amounts. Prepaids and shopped items can vary materially — verify they are reasonable. Any unexplained increases should be questioned. The three-business-day waiting period exists specifically to give borrowers time to review the CD before signing.

Reducing Closing Costs

There are five principal ways to reduce closing costs:

1. Shop title insurance and settlement services. In states where pricing is market-based (less so in Florida and Texas), you can request specific providers for title and settlement services. Even a 10-20% reduction in title cost can save several hundred dollars.
2. Negotiate seller concessions. Sellers can pay part of the buyer's closing costs through a 'seller concession' or 'seller credit.' Program caps apply: FHA up to 6% of purchase price, VA up to 4% in concessions plus all normal closing costs separately, conventional 3-9% depending on down payment.
3. Use a lender credit. The lender pays some or all of the closing costs in exchange for a slightly higher interest rate. The math: a lender credit equivalent to 1 point typically costs roughly 0.25% in rate. Lender credits make sense for short hold periods.
4. Get a refund of POC items. Items paid outside of closing (POC) — typically the appraisal fee — should not be charged again at closing. Verify your CD does not double-charge anything you paid earlier.
5. Use HFA programs that include closing-cost assistance. Florida Bond, Hometown Heroes, TSAHC Home Sweet Texas, THDA Great Choice Plus, SC Housing Homebuyer Program, and CHFA programs all include closing-cost-assistance options for qualifying buyers.

Refinance Closing Costs

Refinance closing costs follow the same general structure as purchase closing costs but with some differences. There is no real estate commission, no seller side, and typically no transfer taxes (most states do not impose transfer tax on a refinance). The principal cost categories are lender fees, third-party fees (appraisal, title, settlement), prepaids and escrow, and any discount points.

Refinance-specific notes: VA IRRRL streamline refinances often have reduced closing costs (no full appraisal, no income re-verification, reduced funding fee at 0.5%). FHA streamline refinances similarly have reduced documentation and lower closing costs. Conventional rate-and-term refinances are full-documentation and full-cost. Texas Section 50(a)(6) refinances have specific fee caps and a 12-day cooling-off period before closing.

Refinance closing costs are typically 2-3% of the loan amount — slightly less than purchase costs in most states because there is no transfer tax and no seller side. The break-even analysis on a refinance (closing costs divided by monthly savings) is the principal test of whether the refinance makes financial sense over the hold period.

State-Specific Notes

Closing costs vary substantially by state, primarily because of state-level title insurance pricing, transfer taxes, and recording fees. Major state notes:

Florida

Florida closing costs include documentary stamp tax on the deed (paid by seller customarily, $0.70 per $100) and on the note ($0.35 per $100 financed by the buyer), plus intangible tax ($2 per $1,000 of mortgage). Title insurance pricing is regulated by Florida statute. Closings are typically handled by title companies.

Texas

Texas title insurance is regulated by the Texas Department of Insurance. No state-level transfer tax. Section 50(a)(6) cash-out refinances have a 3% fee cap on certain costs. Texas closings are handled by title agents.

Tennessee

Tennessee has a state recordation tax on the mortgage and deed, plus modest county recording fees. Title insurance is competitive in pricing. Closings are handled by either title companies or attorneys.

South Carolina

South Carolina requires an attorney to conduct real estate closings — there is no title-company-only model. Attorney fees typically run $400-800. State deed recording fees are modest.

Colorado

Colorado has no state-level transfer tax (some local jurisdictions have small ones, like Aspen and Vail). Title insurance is competitively priced. Closings are typically handled by title companies.

Frequently Asked Questions