When Do I Pay Closing Costs When Buying a Home?

When purchasing a home, understanding the associated financial obligations beyond the agreed-upon price, known as closing costs, is important. These costs, distinct from the down payment, encompass various fees and expenses incurred during the real estate transaction. Closing costs are paid to multiple entities, including lenders, title companies, and other third-party service providers. For buyers, these costs typically range from 2% to 5% of the home’s purchase price. Knowing when these different costs are due is crucial for effective financial planning.

Pre-Closing Expenses

Not all expenses in a home purchase are paid on the final closing day; several financial obligations arise before that date. These initial payments demonstrate a buyer’s commitment and cover services necessary to advance the transaction.

One of the first payments is the earnest money deposit, a good faith gesture signaling a buyer’s serious intent to purchase. This deposit, typically ranging from 1% to 3% of the purchase price, is usually due within one to three business days after an offer is accepted. The funds are generally held in an escrow account by a neutral third party, such as a title company or real estate brokerage, and are later credited toward the buyer’s closing costs or down payment.

Buyers also typically pay for home inspections to assess the property’s condition. These inspection fees, usually ranging from $300 to $500, are paid directly to the inspector at the time of service, often within a week of the offer being accepted. Additionally, a home appraisal is required by lenders to determine the property’s market value, with fees typically between $300 and $500. Appraisal fees are usually paid by the buyer, sometimes upfront or at closing, and are generally non-refundable.

Pre-closing expenses include loan application fees, which some lenders charge to cover the costs of processing a loan request. These fees can range up to $500, though some lenders may not charge them or may include them within other origination fees. A credit report fee, usually less than $30, is also paid to cover the cost of obtaining the buyer’s credit history for the loan application.

Closing Day Payments

The majority of closing costs are settled on closing day, when the property’s title is transferred from the seller to the buyer. These payments are typically made via wire transfer or cashier’s check to ensure funds are immediately available for disbursement. The specific amounts for all these costs are itemized on the Closing Disclosure (CD), a document legally required to be provided to the buyer at least three business days before the scheduled closing date.

Lender fees constitute a significant portion of closing day payments. Origination fees are charged by the lender for processing, underwriting, and administering the mortgage loan, often ranging from 0.5% to 1% of the loan amount. Buyers may also pay discount points, where one point equals 1% of the loan amount, to reduce their mortgage interest rate.

Other costs include title insurance fees, which cover a title search to ensure clear ownership and provide policies protecting both the lender and, optionally, the homeowner against future title defects. An owner’s title insurance policy, while not always required, protects the buyer’s investment and typically costs between 0.5% and 1% of the home’s purchase price. Escrow fees, also known as closing fees, are paid to the title or escrow company for their role as a neutral third party overseeing the transaction and managing funds.

Additionally, buyers may encounter attorney fees if legal representation is required by state law for the transaction. Recording fees are paid to the local government to register the new deed and mortgage, making the property transfer public record. Transfer taxes, imposed by state or local authorities on the transfer of property ownership, also vary by jurisdiction and are paid at this time.

Prorated property taxes and homeowners insurance premiums are often paid at closing. This involves dividing these annual expenses between the buyer and seller based on their respective periods of ownership within the tax or insurance year. Lenders typically require buyers to prepay several months to a year of property taxes and homeowners insurance into an escrow account, which they manage to ensure future payments are made.

Post-Closing Financial Responsibilities

After the closing documents are signed and the keys are exchanged, new homeowners assume ongoing financial responsibilities that extend beyond the one-time closing costs. These are recurring expenses associated with property ownership and maintaining the home.

One ongoing cost is property taxes, paid to local governments to fund public services. The amount varies based on the property’s value and location, and these taxes are often collected by the mortgage lender through an escrow account as part of the monthly mortgage payment. Homeowners insurance premiums also continue after closing, providing ongoing protection against damage or loss to the property. These premiums are frequently managed through the same escrow account as property taxes.

For homes within planned communities, homeowners association (HOA) fees are another regular expense. These fees contribute to the maintenance of common areas and shared amenities within the community. Beyond these structured payments, homeowners are also responsible for utility bills, such as electricity, water, and gas, and general maintenance and repairs. The first mortgage payment, encompassing principal, interest, taxes, and insurance (PITI), is typically due on the first day of the second month following the closing date.