What is the difference between recurring and non-recurring closing costs?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated November 18, 2020

Closing costs are the fees you pay to the lender and other third party service provider too process and close your mortgage. There are two types of mortgage closing costs: non-recurring closing costs and recurring closing costs.

Simply put, non-recurring closing costs are one-time fees that you are not required to pay after your mortgage closes. Non-recurring closing costs are the fees that most mortgage borrowers are familiar with and may include the following items:

Lender fees

Origination fees (also called points)

Discount points (optional)

Upfront mortgage insurance (if applicable)

Title company fees

Escrow company fees

Closing attorney fees

Appraiser fees

Credit report fee

Notary fee

Government recording charge

Non-recurring closing costs typically run thousands of dollars, depending on your lender, loan amount, mortgage program, location and other factors. You are required to pay all of the applicable fees listed above when you mortgage funds but the good news is that they are one-time costs. After your mortgage closes you are not required to pay these fees anymore.

Use our Mortgage Closing Costs Calculator to estimate non-recurring closing costs

The second type of closing costs are recurring costs. These are ongoing fees or expenses that you may be required to pay a portion of when your loan funds. You continue to pay these costs on an ongoing basis after your mortgage closes.  If you are required to use an impound account, you may be required to prepay some of these costs into the account, in advance, at closing. Examples of recurring closing costs include the following items:

Mortgage interest (from the day your mortgage closes until the end of the month in which your loan closes)

Property taxes (partial)

Homeowners insurance premium

Prepaid property tax and homeowners insurance (if you are required to use an impound or escrow account after your loan closes)

Ongoing mortgage insurance (if applicable)

Homeowners association (HOA) dues (if applicable)

Like recurring closing costs, non-recurring closing costs vary based on your mortgage amount, interest rate, property tax rate, insurance coverage, property type and other factors. What makes recurring closing costs different than non-recurring closing costs is that their amount varies depending on when your loan closes.

Review How Much Are Mortgage Closing Costs and a detailed Closing Cost Example

There are multiple reasons why recurring closing costs are important. First, they can be a lot of money. If your mortgage closes early in the month, your pre-paid interest cost may high.  For example, at the beginning of your mortgage, your payment is comprised of approximately 95% interest. So if your monthly mortgage payment is $2,500 and your loan closes on the sixth of the month, you are required to pay approximately $1,900 in pre-paid interest at closing ($2,500 * 95% = $2,375 (interest expense for the month) * 80% (24 out of 30 days in the month = 80%) = $1,900 in interest cost). 

Additionally, depending on the time of year your loan closes and your local property tax rate, the amount of property tax you are required to pay at closing can be significant, especially if your loan closes earlier in the year and you are required to pay several months of property taxes in advance.  For example, if you are required to pay $3,000 in property tax for the first half of the year (ending June 30th) and your loan closes on March 31st, you may be required to pay $1,500 at closing to cover your property tax from April through June.

If you are required to use an impound or escrow account after your loan closes for your mortgage payment, property tax, homeowners insurance and other expenses, you may also be required to pre-pay certain expenses.  These are additional recurring closing costs that are due at closing.  For example, you may be required to prepay up to 15 months of property tax and homeowners insurance, depending on when these payments are due in the future and if they are annual or semi-annual costs (every six months).

Also known as prepaids, these recurring closing costs make sure that you have sufficient funds in your impound account to pay for these items when your first bill is due after closing, so you are paying for these costs in advance.  You may also be required to pay additional funds into your impound account to cover possible cost increases.

Your lender is required to audit your impound account on an annual basis.  Depending on the amount of property tax or homeowners insurance you actually owe when your first bills are due after your mortgage closes, you may receive a credit to you or subtracted from your principal loan balance if you overpaid your prepaids. 

While these are only examples they illustrate how expensive non-recurring closing costs can be.

Although they can be significant expenses, it can be easy to overlook recurring closing costs and focus on non-recurring items such as lender fees. When you think about the total up-front money required to obtain a mortgage, you need to consider both non-recurring and recurring closing costs.

In some cases borrowers may be prepared to pay non-recurring costs and their down payment but do not have enough savings to pay recurring costs. Additionally, if your lender or mortgage program require you to hold savings in reserve, you may need even more money than you expected to close your loan.

Your down payment plus reserves plus non-recurring closing costs plus recurring closing costs can really add up and catch people off guard when they apply for a mortgage. We recommend that you fully understand the total upfront funds required to buy a home before you submit an offer to purchase and apply for a mortgage.

Because they are set expenses, your down payment, non-recurring closing costs and reserves, if required, should be relatively easy to determine. Because recurring closing costs such as partial interest expense and prepaid property taxes vary depending on the specific date your mortgage closes it can be challenging to pinpoint their exact cost but your lender should be able to provide an estimate so you can properly manage your finances.

Additionally, because they do not change based on when your loan closes, you can shop to find the lowest non-recurring closing costs. The table below shows closing fees and mortgage rates for leading lenders in your area. We recommend that you contact multiple lenders to find the best mortgage terms. Comparing multiple proposals is the best way to save money on closing costs.

Sources

"Down Payments & Closing Costs."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.