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Closing costs

Closing costs are the fees and other transaction costs of completing a home purchase or mortgage refinancing, separate from the down payment, and may include loan charges, third-party services, prepaid expenses, and initial escrow funding.

Also called: Settlement costs

by Lee Schmidt

Published October 28, 2026

A mortgage closing involves several kinds of payments collected together. Not every dollar of closing costs is a lender fee. Some amounts pay for services, while others prepay expenses or establish a balance for future bills. Separating those amounts helps you understand both the transaction's charges and the cash you need to complete it.

In a sentence

  • "My closing costs total $9,000 before the seller's credit."
  • "I saved for the down payment, but I still need money for closing costs."
  • "The refinance includes closing costs even though I am not buying another home."

How it works

Closing costs depend on the loan, property, location, services, and closing date. An itemized estimate separates charges for completing the transaction from money collected for expenses you will pay as a homeowner.

ComponentExamplesWhat the money covers
Loan chargesOrigination or underwriting fees and any discount pointsCharges associated with obtaining the mortgage
Third-party and government chargesAppraisal, title services, settlement services, recording fees, and applicable transfer taxesServices and transaction charges outside the lender's own fees
Prepaid expensesAn upfront homeowners insurance premium or interest for the initial partial periodExpenses collected in advance at closing
Initial escrow fundingDeposits toward future property-tax and insurance billsA starting balance held to pay those bills later

Initial escrow funding is not a fee for managing the account. It is money placed in the account for future payments. Not every mortgage requires an escrow account or every charge listed above.

For a purchase with no financed closing costs or other adjustments, the simplified calculation is:

Cash to close = down payment + closing costs − credited deposits − applicable credits

Compare the lender's itemized estimate with the final closing figures. Prorated taxes, charges paid before closing, and other settlement adjustments can change the amount still due.

An example

You buy a $300,000 home with a $270,000 mortgage and a $30,000 down payment. Assume a permitted $3,000 seller credit applies to closing costs, your $2,000 earnest-money deposit is credited at settlement, and no other adjustments apply.

ItemAmount
Loan charges$3,000
Third-party and government charges$2,000
Prepaid expenses$1,500
Initial escrow funding$2,500
Total closing costs$9,000
Down payment$30,000
Combined amount before credits and deposit$39,000
Seller credit−$3,000
Deposit already paid−$2,000
Cash still due at closing$34,000

The deposit reduces what remains to send, not the transaction's cost. The seller credit covers $3,000 of the closing costs; your $30,000 down payment is unchanged.

Why it matters

Closing costs affect whether you can complete a purchase while keeping cash for moving and emergencies. Saving only the down payment leaves the transaction's other cash requirements unaddressed. A credit can reduce your upfront payment, but its conditions belong in the comparison too.

For refinancing, separate fees from prepaid bills and escrow deposits before comparing costs with future interest savings. A lower monthly payment does not by itself show that refinancing saves money, especially when the new loan extends repayment or includes additional borrowed costs.

Closing costs versus down payment and cash to close

Closing costs cover transaction charges and upfront expenses, while a down payment is the portion of the purchase price you pay rather than finance. Cash to close is the settlement total still due after accounting for both, along with deposits, credits, and other adjustments.

A refinance can have closing costs without a purchase down payment. Its cash requirement depends on the settlement figures and which amounts you pay upfront rather than include in the new loan.

Common questions

How much are closing costs? There is no single amount that fits every purchase or refinance. Use an itemized estimate for your property and loan rather than treating a percentage allowance as a quote, and check whether prepaid expenses and initial escrow funding are included.

Can closing costs be financed into the mortgage? Some loans allow eligible costs to be financed, subject to lender and loan-program restrictions. Adding costs to the loan increases principal rather than eliminating the costs, and interest applies to the higher balance under the loan's terms.

Are prepaid expenses and escrow deposits fees? No. Prepaid expenses cover items such as insurance or interest, while initial escrow deposits provide money for future bills. Both can require cash at closing without being fees for processing the mortgage.

What does a no-closing-cost mortgage mean? The label does not establish that costs disappear. Check whether the offer covers specified charges through a lender credit tied to the interest rate, adds eligible costs to the loan, or leaves some items payable upfront.

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