Complete Guide to Closing Costs | My Mortgage Insider

What are closing costs?

Any home loan — whether to purchase a new home or refinance a current loan — will come with closing costs. Closing costs cover a variety of fees related to the processing of a mortgage or required prepaid items like homeowners insurance and property taxes.

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How much are closing costs?

In general, closing costs average 2-5% of the loan amount. That said, closing costs vary depending on the loan amount, mortgage type and the area of the country where you’re buying or refinancing.

Below is a list of the most common closing costs and their approximate costs.

Remember, everyone’s situation is different. The best way to get an accurate estimate of your loan’s costs is after your mortgage application is processed, and you receive an itemized closing cost sheet from your lender.

In this article:

What are average closing costs in 2022?

Based on the most recent data, average closing costs in 2021 were $6,827 for single-family homes. That’s up 12.3% from the previous year, which makes sense as home prices and values have risen significantly as well.

Since closing costs are partly based on your loan amount and home values, in general, are increasing, homebuyers can expect the cost of closing to continue to rise.

However, the closing costs you’ll face will vary widely based on your location. If home prices are more affordable, then you might not pay quite so much to close on your mortgage. But if you live in a very expensive area, then you should expect to pay a bit more than the average when closing on your loan.

Why are closing costs necessary?

When you take out a mortgage, closing costs may seem like an unnecessary expense. Although tempting to discount the necessity of closing costs, mortgage lenders must charge these fees. The expenses within closing costs are designed to protect the lender from making a bad investment. Plus, the costs can be used to cover the expense incurred by the lender when facilitating your loan.

For example, one of the fees included in closing costs is the home appraisal fee. The appraisal will help the lender ensure that they aren’t providing a mortgage for more than the house is worth. Not only does this protect the interests of the lender, but also the interests of the buyer. After all, you don’t want to be stuck with a property that’s worth less than the outstanding mortgage balance.

Another example is the title expense of hiring a title company. Essentially, this allows a lender to confirm that you can legally buy the home. By confirming a clear title, the lender ensures that they aren’t making a loan on a legally unavailable property. But the buyer also benefits because an unclear title would lead to significant headaches.

When do you pay closing costs?

You pay closing costs at the end of the loan process — when the transaction closes.

You don’t have to pay closing costs separately from your down payment. After you sign the final loan paperwork, the escrow company calculates all of the closing costs and adds that to your down payment amount, then subtracts any lender credits or seller-paid costs. That is the amount you’ll need to hand off to the escrow company.

Closing cost breakdown

This table shows estimated closing costs for a $250,000 conventional loan in Washington state. Closing costs are based on your loan type, loan amount, lender and geographical area; your costs will likely look different.

Item	Fee
Loan origination fee	$2,500 (1% of loan amount)
Discount fee	$625 (0.25%)
Processing fee	$450
Underwriting fee	$500
Wire transfer	$25-$50
Credit report	$35
Tax service	$50
Flood certification	$20
Title insurance	$550
Escrow/signing	$450
Courier fee	$20
Appraisal	$450
Recording	$110
Homeowners insurance premium (1st year)	$700
Property tax reserves (6 months)	$1,500
Estimated Total	$7,985 (3.2% of loan amount)

Lender fees

Every home loan is financed through either a private bank, mortgage company, or non-profit credit union whether it’s a government-backed loan or not. These businesses have overhead costs like employees and bank branches. Therefore, a portion of your closing costs go towards paying these companies to handle your loan for you. Below are the common fees you can expect to be charged from your lender.

Origination fee (0-1% of the loan amount)

The lender origination fee is essentially a portion of the lender’s compensation for originating your loan — in other words, finding you as a customer and working your loan through to completion. This fee can vary widely by lender, because a lender can make money on the loan in other ways.

For example, one lender may not charge an origination fee, but give you a higher interest rate. While another lender may charge you no origination fee and give you a low interest rate, but charge high processing and underwriting fees. It’s important to look at the entire list of closing costs and not just the origination fee.

Mortgage broker fee (0-1% of the loan amount)

This fee is the same as an origination fee, but is charged by mortgage brokers. Mortgage brokers are companies that help homebuyers shop various lenders for the best deal, but don’t ultimately lend the funds. You should never be charged both a mortgage broker fee and an origination fee.

Discount fee (0-2%+ of the loan amount)

Discount fees (or discount points) are fees you pay your lender to lower your interest rate. This process is also known as “buying down the rate.” Here’s how it works:

You pay one discount point, which means you pay 1% of the loan amount.
Your lender cuts your interest rate by a certain percentage per point. (Typically, the rate is reduced by 0.25%, but there’s no set amount. How much a discount point will reduce the rate varies by the lender, type of loan, and current mortgage interest rates.)

If you can afford to pay discount points and are planning on staying in your home for a lengthy period of time, then they’re likely worth the cost. But, if you don’t stay in the home long enough to break even with the cost of the discount fee, then you lose that money.

Typically, it’s not worth paying a discount fee of much more than 1%. Most homeowners have a mortgage for less than seven years, so paying extra money to get a lower rate usually doesn’t save any money.

Processing fee ($300-$900)

Loan companies hire loan processors who are responsible for gathering all of the documentation required to close your loan. While your loan officer is concentrated on the customer-facing side of the business, the processor focuses on the behind-the-scenes work that goes into your loan. Not all companies charge a processing fee, so take that into consideration when comparing lenders.

Underwriting fee ($300-$900)

The underwriter is the final decision maker on your loan approval. The underwriting fee goes towards paying for the necessary staff to analyze your documentation and loan application and decide whether or not to approve your loan.

Application fee/commitment fee ($100-$350)

Some lenders charge an upfront, non-refundable deposit to take your application. It’s recommended that you avoid these lenders, because you don’t want to lose that money if you change your mind or your mortgage application is denied. You shouldn’t have trouble finding lenders that don’t charge this fee.

Lock-in fee ($100-$300)

It can take a few weeks to process your mortgage application and mortgage interest rates fluctuate daily. Some companies will lock in your rate while your application processes for a set fee.

Services ordered by the lender

There are various services required to process your loan. The lender collects fees to pay for each of these services, which are included in your closing costs.

Credit report fee ($20-$40)

Lenders pull your credit when you apply for a loan. This is a vital part of the loan application, because it gives the lender a look at your credit history.

If your score is too low, your lender may try to raise your score with a rapid rescore process. This can cost hundreds of dollars, but it can be worth it if you get a better rate or helps you qualify.

Your reported score also affects your interest rate. Credit reports are supplied by credit agencies that charge for the report, hence the fee.

Flood certification ($20)

Every home in the U.S. is either in a flood zone or not. The determination is based on FEMA flood maps. Lenders need to know whether or not your home is in a flood zone, and if it is, that flood insurance is available. Lenders won’t approve a loan that is in a flood zone, but doesn’t have specific flood insurance available.

Tax service fee ($50)

This fee goes to the company hired to make sure all tax liens are paid on the home. A municipality like a city or county can seize a home with past-due taxes. Lenders obviously like to avoid that situation.

Wire transfer fee ($25)

This fee pays the bank fees associated with wiring loan funds. If you use a cashier’s check to pay for your closing costs and down payment, you’ll likely not pay this fee.

Courier fee/postage fee ($20-$30)

Occasionally, lenders have documents hand-delivered or overnighted when gathering all of the documentation for processing your loan. This fee pays for those costs.

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Upfront fees for government-backed loans

Government-backed loan types require an “upfront fee.” Upfront fees are technically not closing costs. But, they show up on the fee estimate you receive from the lender, so it’s good to be aware of them.

Also, the name is misleading — you don’t have to pay for these with cash upfront; they’re typically rolled into your final loan amount. Conventional loans do not require an upfront fee. For other loan types, a fee applies as follows:

USDA loans require a 1.0% upfront fee
FHA loans require a 1.75% upfront fee
VA loans require an upfront fee between 1.4% to 3.6% of the loan amount. The amount depends on prior usage of the VA home loan benefit, down payment amount, and military status. Veterans disabled in the line of duty may be eligible to waive this fee.

Third-party fees

Third-party fees are costs for services by other parties associated with your loan that aren’t your lender — for example, the title company and the appraiser.

Finding a title company that also has an escrow department is often less expensive than hiring two different companies.

These fees will be similar no matter which lender you choose. They’re not as important as comparison shopping lender fees, but you should still examine the fee amounts and ask about them. For example, some lenders work with more expensive title and escrow companies. But, for refinances, you can shop around for your own title and escrow agent to bring the cost down.

Appraisal ($350-$500+)

Appraisers are professional home value estimators who determine the value of the home. (Your lender uses this value when evaluating your loan qualification.) Appraisals typically charge around $500 for their services. Though, expect to pay up to $1,000 if you’re purchasing a high-value home or unique property, or perhaps even more with some jumbo loans.

Pest inspection ($100-$500)

Some areas always require a pest inspection, though this isn’t common. Most areas only require one if there is evidence of pest infestation noted on the appraisal report.

Title report/title insurance ($300-$1,500+)

This fee can vary widely as it’s based on the home’s value and geographic location as well as the loan amount. A title company’s job is to research all past claims on the home and ensure the title is “clear” — meaning no one can claim a right to the home. They also issue insurance in the event something was missed.

There are two kinds of title insurance and you’ll need both when getting a mortgage. The lender’s title policy repays the bank that holds the loan in case the home is lost to a title claim. The owner’s title policy protects the owner.

Who pays for each policy varies. In some areas of the country, the seller pays the owner’s title insurance for the buyer, while the buyer typically pays the lender’s policy. Ask your real estate agent or lender if the seller is paying for the owner’s policy. If not, your title insurance costs could double.

For refinances, you won’t pay for an owner’s policy, since it was already purchased when you bought the home; you will be responsible to pay the lender’s policy on the new mortgage.

Escrow fee ($300-$700+)

The escrow company handles all the funds involved in the home buying transaction. They make sure all parties pay and get paid appropriately. For example, at closing, the lender wires in loan funds and the buyer wires the down payment and closing costs. The escrow company then pays off any existing loans on the home, pays third-party service providers, and wires the rest of the funds to the seller. The escrow company also handles getting all of the loan documents signed and notarized.

The escrow fee (also known as the settlement fee or closing fee) is based on the loan amount and/or purchase price, so expect to pay more on higher-cost homes.

Notary fee ($100-$150)

The escrow company won’t usually charge you an extra fee if you sign your final loan documents at their office. However, if you choose to sign elsewhere like your home, then they may charge a fee to send a notary (a signer who can notarize documents) to you.

Closing protection letter (CPL) ($50)

This fee is only required when the escrow company is not associated with the title company and is not common. It’s a letter stating that the title company is responsible if the escrow company doesn’t distribute funds appropriately.

Survey fee ($400+)

Occasionally, the title company needs to determine property lines. A survey is required in this case but isn’t common.

Attorney fees ($400+)

Some states require an attorney to be involved in negotiating the sales contract and facilitating a timely closing. If your state requires one, shop around for an inexpensive attorney — it’s mostly a formality, so no need to break the bank.

Government-processing charges

Each county has its own charges to record the home’s transfer of ownership.

Recording fee ($20-$250)

This fee is determined by the county in which the property is located. The county records details of the transaction and the new owner’s information for tax purposes each time a home is bought and sold. The process of recording it also solidifies your legal ownership of the property.

Transfer taxes (fee varies)

Some states tax home purchases and refinances — any transfer of real estate from one owner or mortgage company to another. The cost can be substantial. Some areas require a percentage of the new loan amount or the home price.

Prepaid items

Prepaid items are costs associated with owning your home that lenders require you to pay in advance. These are not really closing costs — you have to pay for these items when you own a home and they’re not tied to your mortgage per se. For example, lenders collect one year of homeowners insurance premiums upfront to guarantee the home is insured.

Prepaid closing costs do add to the cash you’ll need to close your loan, so they’re important to keep in mind. And, they can easily add up to a significant amount of money. For example, if property taxes are $300 and the lender collects six months’ worth, that’s $1,800 for that one item.

Don’t forget to factor in these costs when you’re looking to buy.

Homeowners insurance ($400-$1,000+)

Lenders need proof that your home is insured for as long as you hold a mortgage loan with an adequate homeowners insurance policy (also known as hazard or fire insurance). In general, lenders collect at least one year’s premium at loan closing and pay the insurance company. The amount of this fee depends on the value of your home, the amount of insurance coverage, and the yearly premium.

Flood insurance ($300-$1,000+)

Flood insurance is required if your home is in a flood zone as determined by your flood certification. Like the homeowners insurance policy, lenders need to ensure the policy is paid for the first year when the loan closes.

Tax reserves ($500-$5,000+)

This cost can vary widely based on the home’s property taxes and the time of the year the loan closes compared with when the county collects taxes. Some counties collect property taxes twice per year (often April and October), for example.

Lenders need to collect enough to pay the upcoming tax installment. They’ll typically collect between three to eight months of taxes to cover the first tax payment.

Keep in mind that you’re only paying taxes for when the home officially belongs to you — the seller is responsible for the taxes up until the day the loan closes.

Mortgage insurance ($100-$700+)

If you have a conventional mortgage and not a government-backed loan like FHA, USDA, or VA that requires private mortgage insurance (PMI), the lender will collect at least two months’ worth of premiums.

Prepaid daily interest charges ($100-$2000+)

You prepay interest on your loan from the day your loan closes to the end of the month. For example, if you close on the 15th of the month, then you prepay 15 days of interest in advance. If your loan funds at the end of the month, this charge will be small. Basically, if you close near the start of the month and you have a big loan amount, then the charge may be substantial.

How to reduce closing costs

Although closing costs are an unavoidable part of homeownership, that doesn’t mean you need to overpay.

Here are a few ways to lower the burden of closing costs:

Compare lenders

You can shop around to find a lender with the most affordable closing costs. If you want to shop around, then ask several lenders for a Loan Estimate.

Although lenders aren’t required to provide a Loan Estimate before you apply, many are willing to provide this document. Within the Loan Estimate, you’ll find a complete look at your expected closing fees.

Take a look to see which lender is offering the best deal.

Negotiate

Everything in life is negotiable. That principle holds true when it comes to closing costs.

When you receive a Loan Estimate from a lender, consider asking for a discount. Although some lenders won’t be willing to work with you, others will.

If an expense seems unreasonably high, don’t hesitate to ask for a better price. You’ll have more leverage to do so if you get estimates from multiple lenders and use them against one another. After all, the worst they can do is say no. And in the best case, you can save yourself hundreds or thousands of dollars.

Ask about a loyalty discount

If you are getting a mortgage from a financial institution that you already work with, then ask for a discount. In some cases, banks will provide a discount to existing customers.

Negotiate with the seller

In a hot market, sellers are unlikely to contribute to closing costs. But in a cool market, a seller might be willing to pitch in on closing costs to finalize the deal.

If you want to pursue this option, work with your real estate agent to find the best way to ask for this assistance.

Closing costs FAQ

How are closing costs calculated?

Average closing cost amount to 1% to 5% of the loan total. However, the costs vary based on a variety of factors. Borrowers’ exact closing costs will be calculated by the lender. Before you finalize the loan, you’ll have the chance to review all of the expenses included in your closing costs.

Who typically pays closing costs?

First-time home buyers are often surprised by this expense. When it comes to closing costs, there is no hard and fast rule. Most buyers pay the bulk of closing costs. But in some cases, the seller will encounter fees at closing. Specifically, sellers often have to pay their real estate agent’s commission at closing.

What are closing costs in a mortgage?

Closing costs are expenses that a homebuyer or refinancer must pay to finalize their loan transaction. Closing costs can include a loan origination fee, discount fee, processing fee, underwriting fee, wire transfer, credit report, tax service, flood certification, lender’s title insurance, title search, escrow, courier fee, appraisal, local government recording fees, and more.

Other closing costs can be added based on your preferences. For example, you will likely decide to purchase a home inspection. So, there will be an inspection fee added to your costs. Or you may choose to enlist the help of a real estate attorney, which will come at a cost.

Do closing costs come out of the list price?

No, closing costs do not come out of the list price. Instead, homebuyers should consider closing costs as an additional expense on top of the sale price.

How much are title fees when buying a house?

Title fees and title insurance policy costs vary widely when buying a house. The exact fee depends on your state and the property in question. But in general, you can expect to pay $300 to $1,500 or more for title fees when buying a house.

How do I calculate closing costs?

Closing costs will vary based on the home. As an estimate, closing costs should amount to somewhere between 1% to 5% of your loan amount.

The best way to estimate the closing costs of your particular loan is to look at the Loan Estimate provided by your lender. The document should provide a full breakdown of all the expenses you can expect to pay throughout the closing process.

Additionally, you will receive a closing disclosure near your closing date to make sure you are aware of all the expenses.

Apply to get a closing cost estimate

The closing cost estimates provided above are just that — estimates. Every situation is different and many closing costs are determined by the home’s value, loan amount, and where you live among other things.

The best way to get an accurate closing cost estimate is to apply for your upcoming purchase or refinance loan. Lenders will work up an itemized worksheet of closing costs specific to your situation.