Understanding Mortgage Closing Costs

Getting a mortgage isn’t free. Before you get those house keys, you’ll go to the closing table to sign loan documents and paperwork that transfer homeownership from the seller to you.

Throughout your home purchase, third parties—such as your real estate attorney and your mortgage lender—have performed services. Closing costs include the fees these professionals (as well as others) charge for these services to finalize the real estate transaction and your home loan.

What Are Typical Closing Costs?

Closing costs typically range from 3%–6% of the home’s purchase price. Thus, if you buy a $200,000 house, your closing costs could range from $6,000 to $12,000. Closing fees vary depending on your state, loan type, and mortgage lender, so it’s important to pay close attention to these fees.

Homebuyers in the U.S. pay, on average, $5,749 for closing costs (including taxes), according to a 2019 survey from ClosingCorp, a real estate closing cost data firm. The survey found the highest average closing costs in parts of the Northeast, including the District of Columbia ($25,800), Delaware ($13,273), New York ($12,847), Maryland ($11,876), and Pennsylvania ($10,076). Average closing costs in Washington State ($12,406) were also among the highest. The states with the lowest average closing costs included Indiana ($1,909), Montana ($2,063), South Dakota ($2,159), Iowa ($2,194), and Kentucky ($2,276).

A lender is required by law to provide you with a loan estimate within three business days after receiving your mortgage application. This key document outlines the estimated closing costs and other loan details. Though these figures might fluctuate by closing day, there shouldn’t be any big surprises.

Three business days prior to your closing, a lender must provide you with a closing disclosure form. You’ll see a column showing the original estimated closing costs and final closing costs, along with another column indicating the difference if costs rose. If you see new fees that were not on the original loan estimate or notice that your closing costs are significantly higher, immediately seek clarification with your lender and/or real estate agent.

Why Are Closing Costs Necessary?

You’re probably already paying a down payment, not to mention an earnest money deposit to show good faith and a sizable mortgage payment for the foreseeable future. Why do you also have to pay closing costs?

A real estate transaction is a somewhat complex process with many players involved and numerous moving parts. Some states (and some loan products) require certain inspections beyond the basic inspection for which you directly pay a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees, addressed below.

Types of Fees With Closing Costs

All of the closing costs will be itemized on your loan estimate and closing disclosure. Here are some of the standard fees you can expect to see (in alphabetical order).

Application fee

A loan application fee may be charged by the lender to process your mortgage application. Ask the lender for details before applying for a mortgage.

Attorney fee

A fee charged by a real estate attorney to prepare and review home purchase agreements and contracts. Not all states require an attorney to handle a real estate transaction.

Closing fee

Also known as an escrow fee, this is paid to the party who handles the closing, which could be the title company, an escrow company, or an attorney, depending on state law.

Courier fee

If you’re signing paper documents, this fee helps expedite their transportation. If the closing is handled digitally, you might not pay this fee.

Credit report fee

This is a charge ($15–$30) from a lender to pull your credit reports from the three main reporting bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.

Escrow deposit

Some lenders require you to deposit two months of property tax and mortgage insurance payments at closing into an escrow account.

FHA mortgage insurance premium

FHA loans require an upfront mortgage insurance premium (UPMIP) of 1.75% of the base loan amount to be paid at closing (or it can be rolled into your mortgage). There’s also an annual MIP payment paid monthly that can range from 0.45%–1.05%, depending on your loan’s term and base amount.

Flood determination and monitoring fee

This is a fee charged to a certified flood inspector to determine whether the property is in a flood zone, which requires flood insurance (separate from your homeowners insurance policy). Part of the fee includes ongoing observation to monitor changes in the property’s flood status.

Homeowners association transfer fee

If you buy a condominium, townhouse, or property in a planned development, you must join that community’s homeowners association (HOA). This is the transfer fee that covers the costs of switching ownership, such as document costs. Whether the seller or buyer pays the fee may or may not be in the contract; you should check in advance.

The seller should provide documentation showing HOA dues amounts and a copy of the HOA’s financial statements, notices, and minutes. Ask to see these documents, as well as the covenants, conditions, and restrictions (or CC&Rs), bylaws, and rules of the HOA before you buy the property to ensure it’s in good financial standing and a place you want to live.

Homeowners insurance

A lender usually requires prepayment of the first year’s homeowners insurance premium at closing.

Lender’s title insurance

This is an upfront, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that was not found in the title search.

Lead-based paint inspection

You can pay a certified inspector to determine if the property has hazardous, lead-based paint, which is possible in homes built before 1979. It can cost about $300.

Points

Points (or discount points) refer to an optional, upfront payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount. In a low-rate environment, this might not save you much money.

Owner’s title insurance

A title insurance policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts. It usually costs 0.5%–1% of the purchase price.

Origination fee

The origination charge covers the lender’s administrative costs to process your fee and is typically 1% of the loan amount. Some lenders do not charge origination fees, but if they don’t, they usually charge a higher interest rate to cover costs.

Pest inspection

This is a fee that covers the cost of a professional pest inspection for termites, dry rot, or other pest-related damage. Some states and some government-insured loans require the inspection. It usually costs about $100.

Prepaid daily interest charges

A payment to cover any pro rata interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.

Private mortgage insurance (PMI)

If your down payment is less than 20%, your lender could require PMI, and you may have to make the first month’s PMI payment at closing.

Property appraisal fee

This is a required fee paid to a professional home appraisal company to assess the home’s fair market value used to determine your loan-to-value (LTV) ratio. It is usually between $300 and $500.

Property tax

At closing, expect to pay any pro rata property taxes that are due from the date of closing to the end of the tax year.

Rate lock fee

This is a fee charged by the lender for guaranteeing you a certain interest rate (locking in) for a limited period of time, typically from the time you receive a pre-approval until closing. It can run from 0.25%–0.5% of your loan value, though some lenders offer a rate lock for free. A mortgage calculator can show you the impact of different rates on your monthly payment.

Real estate commissions

Here is another big fee: real estate commissions. Buyers typically don’t pay this fee, though; sellers do. The commission charged by a broker is often 5%–6% of the home’s gross purchase price, which is then split evenly between the seller’s agent and the buyer’s agent. These fees can, however, be negotiated at times to make a deal happen.

Recording fee

A recording fee may be charged by your local recording office, usually a city or county clerk’s office, for the official processing of public land records. It is usually about $125.

Survey fee

This is a fee charged by a surveying company to check property lines and shared fences to confirm a property’s boundaries. It is generally between $300 and $500, though it can be higher if the property is large or has unusual boundaries.

Tax monitoring and tax status research fees

This third-party fee is to keep tabs on your property tax payments and to notify your lender of any issues with your property tax payments, such as late or failed payments. The cost changes depending on where you live and the company your lender employs.

Title search fee

This is a fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensures that no outstanding ownership disputes or liens exist on the property. It generally runs between $200 and $400.

Transfer tax

A transfer tax may be levied, depending on the jurisdiction, when the title is handed over from the seller to the buyer. The cost varies geographically.

Underwriting fees

Underwriting fees are charged by the lender for the work that goes into evaluating your application and approving your loan. Underwriting is the research process of verifying your financial, income, employment, and credit information for final loan approval. It can cost as much as nearly $800.

VA funding fee

If you’re a VA borrower, this fee, charged as a percentage of the loan amount, helps offset the loan program’s costs to U.S. taxpayers. The amount of the funding fee depends on your military service classification and loan amount. It can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.

How to Reduce Closing Costs

It might feel like you can’t afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. However, there are ways to negotiate these fees.

Shop around

This applies to lenders and third-party services, such as homeowners insurance policies and title companies. Many homebuyers don’t realize they can save significant money on closing costs if they compare fees from lender to lender. Also, you don’t have to use the title company, pest inspector, or homeowners insurance agent your lender suggests. Do your homework and you could save some serious cash on those fees.

Schedule the closing at the end of the month

A closing date near or at the end of the month helps cut down on prepaid daily interest charges. A lender can run this scenario for you to figure out how much you might save.

Appeal to the seller for help

You might be able to get a seller to either lower the purchase price or cover a portion (or all, if you’re really lucky) of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. In many hot housing markets, though, conditions favor sellers, so you might get pushback or a flat-out “no” if you ask for a seller’s help. But it doesn’t hurt to ask.

Compare the loan estimate and closing disclosure forms

When you get your initial loan estimate, review it with a fine-tooth comb. If you’re unsure about what a fee entails or why it’s being charged, ask the lender to clarify. A lender who can’t explain a fee or pushes back when queried should be a red flag.

Likewise, if you notice new fees or see noticeable increases in certain closing fees, ask your lender to walk you through the details. It’s not uncommon for closing costs to fluctuate from preapproval to closing, but big jumps or surprising additions could impact your ability to close.

Negotiate loan-specific fees

If you suspect a lender is adding on unnecessary fees (known as “junk » fees) to your loan, speak up. Ask the lender to remove or reduce fees if you notice duplication. Comparison shopping can be your ally in reducing closing costs, as well as finding competitive terms and rates. Be especially wary of excessive processing and documentation fees in the following areas:

• Application fee
• Underwriting fee
• Rate lock fee
• Loan processing fee
• Broker rebate

Roll closing costs into your mortgage

In some instances, lenders will offer to pay your closing costs or roll them into your loan. However, you’re not off the hook; lenders tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on those closing costs, as well as higher interest on your mortgage. Do this only as a last resort.

The Bottom Line

Closing costs are unavoidable when you buy a home. If you take proactive steps to shop around and closely analyze your loan estimate with your closing disclosure, you could save big bucks on those fees. As you start saving up for a down payment, set aside enough money for closing costs as well.

Remember that some areas of the country have higher closing costs than others. Above all, be your own best advocate. As you shop around, ask lenders to outline the fees they charge and try negotiating them down whenever possible.