Understanding Closing Costs

“Closing Costs” Is a Misleading Term

On page 1 of every Loan Estimate, there's a field called “Estimated Closing Costs.” It shows one number — say, $7,361. What it doesn't tell you is that number includes three very different types of charges lumped together. Some are negotiable, some aren't, and some aren't really costs at all. Understanding the difference changes how you evaluate any mortgage offer.

Category 1: Loan Costs (Section A of Your Loan Estimate)

These are the charges your lender controls.

Important: Section A varies a lot between lenders — but not always for the reason you'd think. A lender with a low Section A might just be giving you a higher rate (lender credits reduce your upfront costs). A lender with a high Section A might be offering a lower rate (because you're paying points). If you only compare Section A without comparing the rate, you might think one offer is cheaper when it's actually just structured differently.

You need both numbers — the rate AND Section A — to compare. One without the other is meaningless.

Loan costs include:

• Origination fees — what the lender or broker charges to do the loan
• Discount points — upfront fees you pay to buy down the rate
• Underwriting fees — what the lender charges to review and approve your file
• Processing fees — administrative costs for handling your application

This is the section you should compare across lenders. If one lender's Section A is $3,000 higher than another's, that's $3,000 more in their pocket — not yours.

When we talk about a “no-cost” loan, we mean the lender credit covers these charges. How that trade-off works →

Category 2: Third-Party Fees (Section B of Your Loan Estimate)

These are services required to close the loan, but provided by outside companies — not your lender.

Third-party fees include:

• Appraisal — an independent valuation of the property
• Title search and title insurance — verifying ownership and protecting against claims
• Escrow/settlement fees — the company that handles the closing
• Credit report fee — pulling your credit
• Recording fees — county charges to record the deed and mortgage
• FHA upfront mortgage insurance premium — if applicable (this is a one-time fee on FHA loans, separate from the monthly MI)
• Survey or flood certification — if required

These fees are roughly similar no matter which lender you use — but not always. Some lenders steer you to affiliated title companies or add markups on third-party services. That's why Section B of the Loan Estimate matters too.

If a lender's third-party fees seem unusually high compared to another lender's, ask why.

Category 3: Prepaids and Escrows (Section F and G of Your Loan Estimate)

The Loan Estimate calls these “Other Costs” — and borrowers see them as exactly that: costs. They're money you have to bring to closing, and if you roll them into the loan, they increase your loan amount. So they're real.

But they're different from Sections A and B in one important way: they're not charges for the loan. They're charges because of the property.

Prepaids and escrows include:

• Prepaid interest — the daily interest from your closing date to the end of the month
• Homeowners insurance premium — usually the first year, paid upfront
• Property taxes — a few months held in escrow as a cushion
• Escrow reserves — additional months of taxes and insurance the lender holds as a buffer

These amounts are roughly the same no matter which lender you use — because they're based on your property, not your lender's pricing.

When comparing lenders, prepaids won't help you tell the difference. Two lenders quoting the same loan will have nearly identical prepaids. The real difference is in Sections A and B.

If you're refinancing, the cash flow around prepaids gets more complicated — your old escrow account gets refunded, a new one starts, and the timing can affect how much cash you actually need at closing. We explain that scenario in detail here: The Refinance Playbook →

The Number That Matters for Comparison

You cannot compare Section A in isolation. You have to compare the rate AND Section A together — because they move in opposite directions. A low Section A with a high rate isn't a better deal; it's a different structure.

When comparing offers, look at:

1. The rate — at the same point/credit level (ideally par — zero points, zero credits)
2. Section A — at that same rate
3. Section B — to catch any inflated third-party fees

One more thing: origination fees and discount points are often calculated as a percentage of the loan amount. That means the dollar amounts on two Loan Estimates can look very different even when the percentages are the same. A borrower with a $1,000,000 loan paying half a point sees $5,000 in Section A. A borrower with a $200,000 loan paying the same half point sees $1,000. Same deal, very different-looking numbers. Always compare the percentage, not just the dollar amount.

Prepaids (Sections F and G) are real money at closing, but they'll be nearly the same across lenders for the same property. They don't help you tell which offer is better.

Hard Costs vs Soft Costs

Here's a simpler way to think about it:

Hard closing costs are Sections A and B — the costs you would only pay by doing a new loan. If you don't get a mortgage, you don't pay these. Origination, underwriting, appraisal, title, escrow — all hard costs.

Soft closing costs are the prepaids and escrows — costs you pay whether you do a new loan or not. Property taxes, homeowners insurance, daily interest — you owe these regardless. The loan just collects them at closing.

This distinction matters because it changes what “no cost” actually means.

Where “No-Cost” Fits In

A no-cost loan means the lender credit covers your hard closing costs — Sections A and B. Your rate is slightly higher in exchange.

There are exceptions: government funding fees (FHA upfront mortgage insurance premium, VA funding fee) typically can't be covered by lender credits. Those are either paid upfront or rolled into the loan amount.

A no-cost loan does NOT mean you bring zero dollars to closing. Soft costs (prepaids and escrows) are still there. Down payment is still there. You're just not paying the hard costs — the fees that only exist because you're doing a loan.

For a deeper look at whether no-cost makes sense for you: The Breakeven Question →