Why Does My Closing Cost Keep Going Up?

Buying a home involves various financial components. Understanding closing costs is important for homebuyers. These costs represent a collection of fees and expenses incurred to finalize a real estate transaction.

They cover services from various parties involved, such as lenders, appraisers, and title companies. Homebuyers often find initial cost estimates increase as the transaction progresses. Closing costs typically range between 2% to 5% of the home’s purchase price. For example, a $400,000 home might involve closing costs between $8,000 and $20,000.

The Role of Estimates in Closing Costs

Initial figures for closing costs are provided on the Loan Estimate (LE), issued within three business days of a mortgage application. This document approximates the costs you can expect at closing. Loan Estimates are prepared early, before final figures are known, making them subject to change. Federal regulations establish “tolerance levels” that dictate how much certain fees can change from the Loan Estimate to the final Closing Disclosure.

Some fees have a “zero tolerance” level, meaning they cannot increase from the Loan Estimate to the Closing Disclosure. This category typically includes charges paid to the lender, mortgage broker, or their affiliates, as well as transfer taxes. Other fees fall under a “10% cumulative tolerance,” allowing their total to increase by up to 10% collectively. This applies to costs for third-party services that borrowers can shop for, such as recording fees, if a provider from the lender’s list is chosen.

A third category, “no tolerance” or “unlimited tolerance,” includes fees that can change by any amount without restriction. These often involve costs like prepaid interest, property insurance premiums, and amounts placed into an escrow account. Fees for third-party service providers not selected from the lender’s list also fall into this category. These tolerance levels protect consumers from unexpected increases while providing lenders flexibility for variable costs.

Common Drivers of Closing Cost Increases

Several categories of closing costs commonly fluctuate, contributing to increases from initial estimates. These adjustments stem from the dynamic nature of real estate transactions and the timing of initial estimates versus final calculations.

Property Taxes and Insurance Prepaids

Property taxes and homeowner’s insurance prepaids are frequent sources of change. Lenders often require an initial deposit into an escrow account at closing to cover future property tax and insurance payments. The exact amount needed depends on the closing date and local tax schedules, which can vary from the initial estimate. If taxes were recently assessed higher, or if the closing date requires more months of pre-paid taxes or insurance to establish the escrow cushion, the amount due at closing will increase. Typically, lenders may collect three months of additional insurance and three months of property taxes to establish this cushion.

Appraisal and Inspection Costs

Appraisal and inspection-related costs can also rise. While an initial appraisal fee might be estimated, re-inspections may become necessary if repairs are negotiated after the initial home inspection. For example, if the home inspection reveals issues that the seller agrees to fix, a follow-up inspection or re-inspection might be required to verify the repairs. Additional specialized inspections, such as for pests or septic systems, if not initially anticipated, can increase these charges.

Lender Fees and Interest Rate Adjustments

Lender fees and interest rate adjustments can impact final closing costs. If the loan program changes, or if the initial interest rate lock expires before closing, fees may increase. For example, extending a rate lock can incur fees from the lender. If there are changes to the loan amount or a borrower’s credit profile during the process, it might influence lender-specific fees, such as loan origination or underwriting charges. These fees are often a percentage of the loan amount, so any change in loan size affects them.

Title Insurance and Recording Fees

Title insurance and recording fees may also see adjustments. Unexpected issues discovered during the title search, such as previously undisclosed liens or ownership discrepancies, can necessitate additional legal work to clear the title. This “curative work” adds to title company fees. Recording fees, which are set by local government entities to register the transfer of ownership and the mortgage, can vary based on the number of documents needing to be recorded or local regulations.

Homeowners Association (HOA) Fees and Miscellaneous Charges

Homeowners Association (HOA) fees and other miscellaneous charges can contribute to increases. Properties within an HOA often have transfer fees or capital contribution fees that may not be fully accounted for in early estimates. Sometimes, a specific number of months of HOA dues or a working capital contribution is required at closing, which can add to the cash needed. Unexpected special assessments from the HOA or a need for a new property survey can also lead to unanticipated costs.

Deciphering Your Closing Disclosure

The Closing Disclosure (CD) is a five-page document provided by your lender at least three business days before your scheduled closing date. This document provides the final statement of all closing costs and loan terms, allowing for a thorough review before signing. It is important to compare the Closing Disclosure with your initial Loan Estimate to identify where changes have occurred.

The Closing Disclosure uses the same wording and headings as the Loan Estimate to track any differences. Focus on the “Loan Costs” and “Other Costs” sections to see a detailed breakdown of fees. The CD also summarizes the “Cash to Close,” which is the amount of money you will need at closing. If you notice significant discrepancies or have questions about any changes, it is important to contact your lender or settlement agent immediately for clarification before the closing date.