Do Closing Costs Include First Mortgage Payment?

Closing costs are fees and expenses paid by a borrower at the culmination of a real estate transaction. They cover various services and expenses associated with processing the mortgage loan and facilitating the legal transfer of property ownership. These costs are distinct from the down payment, which is the initial equity contribution towards the home’s purchase price.

Understanding Closing Costs

Closing costs are categorized based on their origin and purpose. Lender fees are charges imposed directly by the mortgage lender for their services. These often include a loan origination fee, underwriting fees, and processing fees.

Third-party fees are costs for services provided by external entities involved in the transaction. These include an appraisal fee to determine the property’s market value, a credit report fee for the borrower’s credit history, and a title search fee to research property records. Title insurance premiums protect against future claims on the property’s title. Attorney fees may also be applicable in states where legal professionals are required to handle real estate closings, and survey fees might be charged to verify property boundaries.

Prepaid items are expenses paid in advance at closing to cover future obligations. These commonly include initial property tax payments and homeowner’s insurance premiums, often for several months, deposited into an escrow account. These prepaid amounts, while paid at closing, differ from the service fees as they cover future recurring costs of homeownership rather than transaction-specific services.

First Mortgage Payment and Other Initial Homeownership Expenses

The first full monthly mortgage payment is not included as part of the closing costs. This payment is due on the first day of the second month following the closing date. For example, if a home closes on August 15th, the first full mortgage payment would be due on October 1st, covering interest accrued for September.

While the full monthly payment is not included, certain initial expenses paid at closing can be confused with it. One such expense is prepaid interest, which covers the interest that accrues from the closing date through the end of the month in which the closing occurs. For instance, if closing happens on August 15th, you would pay interest for August 15th through August 31st at closing. This amount ensures that interest is paid up to the point the first regular payment schedule begins.

Another initial financial obligation at closing is the initial escrow deposit. Lenders often require an upfront deposit to establish an escrow account, which is used to hold funds for future property tax and homeowner’s insurance payments. This deposit typically covers a few months’ worth of these expenses, providing a cushion in the account. This differs from the transaction-related closing costs because it is essentially a pre-payment for future recurring homeownership expenses.

The down payment is the initial sum of money a buyer contributes towards the purchase price of the home, directly reducing the amount of the mortgage loan. The first actual mortgage payment, which includes principal and interest for the preceding month, occurs after the closing and is a separate, recurring expense of homeownership.

Reviewing Your Closing Disclosure

The Closing Disclosure (CD) is a standardized federal form that provides a comprehensive itemization of all costs associated with your mortgage loan and the entire real estate transaction. Borrowers receive this document at least three business days before the scheduled closing date. This allows ample time to review all financial details and ask any necessary questions before finalizing the loan.

You can locate and understand the different categories of costs by examining specific sections of the CD. Section A details the loan origination charges imposed by the lender. Sections B and C outline fees for services that you either could or could not shop for, such as appraisal fees, title insurance premiums, and attorney fees. Sections F and G are dedicated to prepaid items and initial escrow payments made at closing, including property taxes and homeowner’s insurance premiums.

The “Cash to Close” figure, displayed on the final page of the CD, summarizes the total funds you will need to bring to closing. This figure encompasses your down payment, all closing costs, and any prepaid items. The actual first full mortgage payment due after closing will not appear as a line item within the closing costs on the CD. Its absence from this document confirms it is a post-closing expense, separate from the funds required at the closing table. Reviewing the entire Closing Disclosure and seeking clarification for any unclear or seemingly incorrect entries is a crucial step before completing your home purchase.