Understanding Mortgage Closing Costs

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 transfers homeownership from the seller to you. Throughout your home purchase, third parties, as well as your lender, have performed services. Closing costs are fees these professionals charge for these services to finalize the real estate transaction and your home loan.

How Much Are Closing Costs?

Closing costs typically range from 2% to 5% of the home’s purchase price. Thus, if you buy a $200,000 house, your closing costs could range from $4,000 to $10,000. 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, $4,876 for closing costs, according to a new survey from ClosingCorp, a real estate closing cost data firm. The survey found the highest average closing costs in parts of the Northeast, including District of Columbia ($12,573), New York ($9,341), Delaware ($8,663), Maryland ($7,211) and Vermont ($6,839). The states with the lowest average closing costs included Missouri ($2,905), Indiana ($2,934), South Dakota ($2,996), Iowa ($3,138) and North Carolina ($3,206).

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. While 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 already paying a down payment, not to mention an earnest money deposit to show good faith and 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 you pay directly to 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 the standard fees you can expect to see:

Application Fee

  • A fee 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: the title company, escrow company or an attorney, depending on state law.
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Courier Fee

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

Credit Report Fee

  • A charge ($15 to $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.

FHA Mortgage Insurance Premium

  • FHA loans require an up-front 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% to 0.85%, depending on your loan’s term and base amount.

Flood Determination and Monitoring Fee

  • 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 homeowner’s 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. This is the transfer fee that covers the costs of switching ownership, such as documents. 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 bylaws, covenants, conditions, and restrictions (or CC&Rs) and rules of the HOA before you buy the property to ensure it’s in good financial standing and it’s a place you want to live.

Homeowner’s Insurance

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

Lender’s Title Insurance

  • An up-front, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that it didn’t find in the title search.

Lead-Based Paint Inspection

  • A fee paid to a certified inspector to determine if the property has hazardous, lead-based paint.


  • Points (or “discount points”) refer to an optional, up-front 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

  • This policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts.

Origination Fee

  • This 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 usually, charge a higher interest rate to cover costs.

Pest Inspection

  • 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.

Prepaid Daily Interest Charges

  • A payment to cover any interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.
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Private Mortgage Insurance (PMI)

  • If your down payment is less than 20%, your lender might require PMI. You might be required to make the first month’s PMI payment at closing.

Property Appraisal Fee

  • A required fee paid to a professional property appraisal company to assess the home’s fair market value used to determine your loan-to-value (LTV) ratio.

Property Tax

  • At closing, expect to pay any property taxes that are due within 60 days of the home purchase.

Rate Lock Fee

  • A fee charged by the lender for guaranteeing you a certain interest rate for a limited period of time, typically from the time you receive a preapproval until closing.
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Recording Fee

  • A fee charged by your local recording office, usually city or county, for the recording of public land records.

Survey Fee

  • A fee charged by a surveying company to check property lines and shared fences to confirm a property’s boundaries.

Tax Monitoring and Tax Status Research Fees

  • A third-party fee 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.

Title Search Fee

  • A fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensure that no outstanding ownership disputes or liens exist on the property.

Transfer Tax

  • A tax levied to transfer the title from the seller to the buyer.

Underwriting Fee

  • A fee charged by the lender for underwriting your loan. Underwriting is the research process of verifying your financial information, income, employment and credit for final loan approval.

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; the fee can be paid at closing or rolled into your mortgage. Some military members are exempt from paying the fee.

Another big fee: real estate commissions. Buyers don’t pay this fee, though; sellers do. Typically, the commission fee is 5% to 6% of the home’s purchase price, and it’s split evenly between the seller’s agent and the buyer’s agent.

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.

  1. Shop around. This applies to lenders and third-party services, such as homeowner’s 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 homeowner’s insurance agent your lender suggests. Do some homework, and you could save some serious cash on those fees.
  2. Schedule 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.
  3. Appeal to the seller for help. You might be able to get a seller to either lower the purchase price or to 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. It doesn’t hurt to ask.
  4. 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 pre-approval to closing, but big jumps or surprising additions could impact your ability to close.
  5. Negotiate loan-specific fees. If you suspect a lender is adding on unnecessary fees, known as “junk fees,” on 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:
    1. application fee
    2. underwriting fee
    3. rate lock fee
    4. loan processing fee
    5. broker rebate
  6. Roll closing costs into your mortgage (as a last resort). In some instances, lenders will offer to pay your closing costs or roll them into your loan. But 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 your loan – and on closing costs.

The Bottom Line

Closing costs are unavoidable when you buy a home. If you take proactive steps to shopping 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, too. 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.

(Also see: Ultimate Mortgage Guide, How Do I Get Pre-Approved for a Mortgage?, How to Choose the Best Mortgage, 11 Mistakes First-Time Homebuyers Should Avoid, How Much Money Do I Need to Put Down?, What Is Mortgage Insurance and What Are My Options?, How to Get the Best Mortgage Rate, and What Are the Main Types of Mortgage Lenders?)