A Comprehensive Guide for Homebuyers

Buying a home comes with plenty of numbers to think about, from the purchase price and down payment to your estimated monthly mortgage payment. But there's another important piece of the homebuying budget that can sometimes catch first-time buyers by surprise: closing costs.

Closing costs are expenses associated with finalizing your mortgage and home purchase. Understanding what they are, what they may include, and how they differ from your down payment can help you create a more realistic homebuying budget and feel better prepared when closing day arrives.

What Are Closing Costs?

Closing costs are the various expenses and fees associated with completing a real estate transaction and mortgage. The specific costs you encounter will depend on factors such as your loan, property, location, and transaction.

Some closing costs relate directly to getting a mortgage, while others may involve the property, taxes, insurance, or services needed to complete the home purchase. Rather than thinking of closing costs as one big fee, it may be easier to think of them as a collection of expenses that come together at closing.

Closing Costs vs. Down Payment: What's the Difference?

It's easy to confuse closing costs with your down payment, especially if you're buying a home for the first time. They're two different parts of the purchase.

Your down payment is the portion of the home's purchase price that you pay upfront rather than finance through your mortgage. Closing costs, on the other hand, generally include expenses associated with obtaining the mortgage and completing the purchase.

For example, imagine you've spent months setting aside money specifically for a down payment. If you haven't also planned for closing costs and other homebuying expenses, the amount needed to complete your purchase could be higher than you anticipated.

Front Door Tip: When setting a savings goal for a home, think beyond the down payment. Building closing costs and other potential homebuying expenses into your plan can help you create a more realistic target.

What Can Be Included in Closing Costs?

The exact costs vary by transaction, so not every homebuyer will see the same items. Still, there are several types of expenses you may encounter.

Loan-Related Costs

Some expenses are associated with obtaining and processing your mortgage. Your loan documents should provide information about the charges that apply to your particular mortgage.

Because loan-related costs can vary, review each charge rather than assuming every mortgage will have the same fees.

Appraisal

An appraisal may be required as part of the mortgage process. It provides an independent professional opinion of the property's value and helps the lender evaluate the property in connection with the mortgage.

As we discussed earlier in the Front Door series, an appraisal isn't the same as a home inspection. An appraisal is related to the property's value for the lending transaction, while a home inspection generally gives the buyer information about the physical condition of the property.

Title-Related Costs

A real estate transaction can include services related to researching and transferring ownership of the property. Depending on the transaction, title-related services and insurance may be among the costs a homebuyer encounters.

Your closing documents should identify the title-related charges that apply to your particular purchase.

Taxes and Government Fees

Depending on where the home is located and the specifics of the transaction, there may be taxes, recording charges, or other government-related fees associated with purchasing the property.

Because these expenses can vary by location, they're another reason it's important to review the estimates for the home you're actually considering rather than relying solely on a generic homebuying example.

Prepaid Expenses

Not every amount due at closing is necessarily a fee.

You may need to pay certain expenses in advance as part of your transaction. Depending on your mortgage and property, this could include items related to interest, property taxes, homeowners insurance, or an escrow account.

Understanding the difference between a fee and a prepaid expense can make your closing documents easier to follow.

Where Can You Find Your Estimated Closing Costs?

Fortunately, you don't have to wait until closing day to see information about your estimated mortgage costs.

During the mortgage process, you'll encounter important documents designed to help you understand the financial details of your loan. Two you'll want to become familiar with are the Loan Estimate and Closing Disclosure.

Your Loan Estimate

After you apply for a mortgage and provide the required information, you may receive a Loan Estimate showing important information about the mortgage you've applied for and its estimated costs.

Take time to review it carefully. In addition to looking at your estimated monthly payment, pay attention to the costs associated with obtaining the loan and completing the transaction. If you don't understand a particular charge, ask your mortgage team to explain it.

Your Closing Disclosure

As you approach closing, you'll receive a Closing Disclosure with information about the final terms and costs of your mortgage.

Review it carefully and compare the information with what you've previously received. If something is different from what you expected or you don't understand a particular cost, ask questions before closing.

Your closing documents aren't paperwork to rush through. They're an opportunity to understand where your money is going before you complete one of the biggest financial transactions you may make.

Why Can Closing Costs Change?

The numbers you see early in the mortgage process are estimates, and certain costs can change as the transaction progresses. The specific amount you'll owe depends on the details of your mortgage and home purchase.

That's another reason to stay in communication with your mortgage team. If an updated document contains something you don't understand, asking about it can help you understand what changed and why.

Rather than building your homebuying budget around a generic closing-cost estimate, use the information provided for your particular mortgage and transaction whenever it's available.

How Can You Prepare for Closing Costs?

You don't need to know the exact cost of every item before you begin thinking about homeownership. But including closing costs in your planning from the beginning can make the eventual numbers much less surprising.

Save for More Than Your Down Payment

If all of your available homebuying savings is earmarked for the down payment, you may leave yourself with little flexibility for other expenses. Consider your broader financial picture when determining how much cash you're comfortable using toward a home purchase.

Review Your Loan Documents

Your Loan Estimate and Closing Disclosure contain valuable information about your mortgage and associated costs. Don't focus solely on the interest rate or monthly payment.

Review the complete picture and ask about anything that isn't clear.

Keep Some Breathing Room in Your Budget

Closing isn't necessarily the last time you'll spend money on your new home.

You may also have moving expenses, utility costs, furnishings, maintenance, repairs, and other expenses after you get the keys. Preserving some savings rather than stretching your available funds to their limit can give you more room to handle the expenses that come with settling into a home.

Be Cautious About Last-Minute Payment Instructions

Buying a home can involve transferring a significant amount of money, which makes security particularly important. Treat payment or wire instructions carefully and follow the verified procedures provided by the professionals handling your transaction.

If you receive unexpected instructions or a request to change previously provided payment information, don't rely solely on the message you received. Verify the request using a trusted contact method before sending money.

A little extra caution is worthwhile when you're dealing with something as important as the money for your home purchase.

What Should You Ask Before Closing?

Closing documents contain a lot of information, and you aren't expected to become a mortgage expert overnight. Asking questions can help you understand exactly what you're agreeing to.

Before closing, make sure you're comfortable with important details such as:

• What amount will I need to provide at closing?
• What closing costs am I paying?
• What expenses am I paying in advance?
• What will my monthly mortgage payment be?
• Are property taxes or homeowners insurance included through an escrow account?
• Who should I contact if I have a question about a charge?
• How should closing funds be provided securely?

If something doesn't make sense, ask. Understanding the transaction is more important than trying to get through the paperwork as quickly as possible.

Closing Costs Are Part of the Bigger Homebuying Picture

Saving for a home can be exciting. Watching that down payment fund grow can make your future home feel more real with every contribution.

Just remember that getting through your new front door involves more than the down payment.

Planning for closing costs, understanding your loan documents, maintaining some savings, and asking questions along the way can help you approach closing day with fewer financial surprises.

Then you can focus on the part you've been working toward all along: getting the keys and making that new front door yours.

Ready to Take the Next Step Toward Homeownership?

Understanding the costs involved in buying a home can help you build a more realistic budget and prepare for the mortgage process with greater confidence.

Explore UCU home loan options and resources to learn more about financing your next home.