Closing costs are the fees paid at the closing of a mortgage loan and typically total 2% to 5% of the loan amount. They fall into two broad categories. Recurring closing costs, such as property taxes, homeowners insurance, and prepaid interest, are ongoing expenses that repeat over time. Non-recurring closing costs, such as origination fees, title insurance, appraisal fees, and underwriting fees, are one-time charges paid at closing. Origination fees are charged by lenders to process a new loan application, typically 0.5% to 1% of the loan amount, and cover underwriting, processing, and administrative costs. Discount points are separate from origination points: they are prepaid interest that lower the loan's interest rate in exchange for an upfront fee, with each point costing 1% of the loan amount and lowering the rate by approximately 0.25%.
To make shopping easier, federal rules require standardized disclosures. The Loan Estimate is a three-page form lenders must provide within three business days of a mortgage application, disclosing loan terms, projected payments, closing costs, and key comparisons. The Closing Disclosure is a final five-page form provided at least three business days before closing, itemizing loan terms, monthly payments, closing costs, and cash to close so the borrower can compare it with the Loan Estimate. These requirements come from TRID, the TILA-RESPA Integrated Disclosure rule, which combines obligations under the Truth in Lending Act, or TILA, and RESPA. TILA itself requires lenders to disclose APR, total finance charges, and payment schedules in a standardized format, and gives consumers the right to cancel certain credit transactions within a three-day rescission period after closing, an important protection against predatory lending.
Predatory lending practices include excessive fees, inflated interest rates, loan flipping (repeatedly refinancing into new loans), packing unnecessary features into the loan, steering borrowers into higher-cost products, and targeting vulnerable populations. Borrowers can defend themselves by comparing multiple offers and reading every disclosure carefully. Other consumer protections include the right of rescission on refinances and home equity loans (but not purchase loans), which gives borrowers three business days after closing to cancel without penalty. The statute of limitations on debt collection, which varies by state and is typically 3 to 10 years, restricts the period during which a creditor can sue to collect an unpaid debt, though it does not erase the debt itself. Title insurance protects the lender and optionally the buyer against financial loss from defects in the property title, such as liens, easements, or ownership disputes not found during the title search, while hazard insurance covers the structure against risks like fire and wind and is required by lenders to protect their collateral.