Mortgage Closing Costs: What to Know About These Overlooked Homebuying Fees         Story by Adam Hardy

Conventional homebuying advice focuses heavily on the money you’ll need to save up for a down payment but gives less attention to the notable sum required to cover closing costs.

It’s no surprise, then, that these costs often come as an unwelcome, budget-busting surprise, especially for first-time homebuyers.

If you’re in the market for a home, don’t underestimate these fees. This guide covers the expenses usually included in closing costs, typical closing cost amounts, tips to minimize them, and more to help you prepare.

Table of contents

• What are the closing costs on a mortgage?
• Types of mortgage closing costs
• Calculating mortgage closing costs
• Tips to minimize closing costs
• Mortgage closing cost FAQs
• Summary of Money’s guide to mortgage closing costs

What are the closing costs on a mortgage?

Mortgage closing costs are expenses and fees that both the homebuyer and seller pay at the end of the sales process, including expenses related to the mortgage loan, taxes, insurance and more. These costs can vary widely depending on where you live. It’s important to note that the down payment is also due at closing but is not considered a closing cost.

According to FreddieMac, homebuyers' closing costs usually range from about 2% to 5% of the loan amount. The latest stats from CoreLogic, a real estate data firm, show that the average closing costs for single-family homes in 2021 were about $6,900.

Types of mortgage closing costs

Mortgage closing costs should be broken down in your initial loan estimate from when you applied with the mortgage lender and then again, in more detail, on your closing disclosure form, which lenders must provide at least three days before the settlement date.

Here’s a closer look at the typical closing costs you might have to pay.

Loan origination and lender fees

Mortgage lenders have a host of administrative fees they charge. The best mortgage lenders will be very upfront about such fees and will be willing to negotiate with you.

• Loan application fee: A fee to process your mortgage application, typically ranges from $0 to $500.

• Origination fee: A fee lenders charge to cover the administration of the loan, typically ranges from 0.5% to 1% of the amount of your mortgage. The loan origination fee may be used to pay your loan officer or mortgage broker.

• Underwriting fee: This may be a separate fee from the origination fee, but it similarly goes toward verifying your application's financial information.

• Credit report fee: A fee for pulling your credit reports from the three major credit bureaus to ensure you meet the credit score requirements. The fee may be part of the origination process or due before closing, usually $30.

Home appraisal fees and inspection costs

• Home appraisal: A professional assessment that determines the home’s value and is required by mortgage lenders. Average home appraisals cost about $350.

• Home inspection: While not officially a closing cost, home inspections — separate from appraisals — can help borrowers unearth HVAC, roofing, plumbing, energy efficiency or other specific issues with a home before they buy it. They’re optional but highly recommended, and usually run $300 to $400.

• Pest inspection: In addition to the home appraisal, some mortgage lenders require pest inspections to rule out termites or other destructive animals; typically, $150.

• Flood determination: In some cases, an inspector may need to determine whether the home is in a flood zone, thus requiring flood insurance. This is relatively inexpensive, around $20 to $50.

Title fees

• Title insurance: Usually required by lenders, title insurance protects the mortgage lender—not you. Its cost is based on a percentage of the sales prices (usually 0.5% to 1%), and it can be bundled optionally with an insurance policy that protects you as a buyer, too, called owner’s title insurance.

• Title search fee: Covered by the home seller, a title search fee pays for examining public records related to the property; it costs $75 to $200.

• Other title fees: Other title fees may include itemized charges for the title company's administrative processes during the closing process, such as compiling a summary of the title search and processing settlement documents, normally about $125 to $400.

Real estate agent and attorney fees

• Real estate agent commission: Another quasi-closing cost, real estate compensations are typically paid for by the seller and usually equate to 5%- 6% of the sales price—split between your agent and the seller’s agent.

• Attorney fees: In several states, such as Alabama, Maryland, Vermont, and West Virginia, real estate attorneys are required to be involved in real estate transactions. Fees vary widely by state and services provided, including other tax and notary services.

Prepaid expenses

• Prepaid interest: Depending on your lender, you may be asked to pay the interest that accrues on your home loan for the time between the closing date and your first mortgage payment.

• Property taxes: Annual property taxes, which fund local schools and public services, are sometimes due upfront at closing. Local government taxes and fees vary widely based on location.

• Mortgage and homeowners’ insurance: Your lender may require you to pay certain property-related expenses, including insurance premiums for homeowners or private mortgage insurance (sometimes called PMI) in advance through an escrow account. Your initial escrow deposit may include property taxes and your homeowners or mortgage insurance premiums. Check your closing disclosure carefully to see if this is required and, if so, what charges are included.

Calculating mortgage closing costs

While the national average closing cost is just under $7,000, these expenses can fluctuate greatly depending on your area.

For instance, CoreLogic found that the estimated closing costs in Washington, D.C. (including taxes) were nearly $30,000, amounting to 3.9% of the sales prices. In Missouri, closing costs were much cheaper: just over $2,000, which is less than 1% of the average sales price.

Because of this broad range, it’s important to research the trends, rules, and regulations in your area. Your real estate agent should be able to clue you in.

Another simple way to get an idea of how much you’re likely to pay is to use online closing cost calculators ahead of time. This way, you can build up enough savings to comfortably cover the costs in addition to your down payment.

Once you find a home and lender, you’ll get more detailed cost estimations as required by the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA), two federal consumer-protection laws.

The loan estimate (LE) form

Thanks to federal protections, mortgage lenders are required to send you a standardized loan estimate form when you’re shopping around. The form will have your information, basic loan term details, estimated monthly payments, and the money due at closing.

You should consider several lenders at this stage by comparing the closing costs, payments, and mortgage rates quoted to you on your loan estimate form. They have to honor these terms for at least 10 business days, giving you time to decide.

PRO TIP: This form has a section of “services you can/cannot shop for.” If, for example, your loan estimate has a high quote for title services or pest inspection fees, you can shop around independently to find a better deal.

The closing disclosure (CD) form

After you’ve decided on a lender and continued with the home buying process, the mortgage company must send you a new standardized form with a more detailed breakdown of your costs and fees. This form will also compare what the seller is responsible for paying and list any seller concessions and/or miscellaneous fees.

It will also list the services you shopped around for, if they were different from the ones suggested by your mortgage lender on the loan estimate form.

Tips to minimize closing costs

Closing costs can really add up, reaching thousands or even tens of thousands of dollars in some cases.

As you approach the homestretch of your home purchase, you may be tempted to pay the first estimate you see. But there are a few savvy moves you can make to lower your closing costs.

1. Negotiate with the seller: Many closing costs are negotiable, so it’s always worth discussing it with the seller. Note, though, that sellers are limited in how much they can contribute to your portion of the closing costs. The limit ranges between 3% and 9% of the home’s price depending on the size of your down payment and type of loan, e.g. conventional loan, FHA loan or VA loan. In most cases, the larger your down payment, the more the seller can contribute.
2. Shop around for certain services: In addition to shopping around for the right lender, you can also shop around for specific services that are a part of the closing process, such as fees related to title insurance and certain lender-required inspections and surveys. As mentioned above, these shoppable services should be clearly listed on your initial loan estimate from your mortgage lender.
3. Consider a no-closing-cost mortgage (carefully): If you’re short on the upfront funds required to close, your mortgage lender may offer what’s known as a no-closing-cost mortgage. The name is a misnomer because you’re still paying those fees. But instead of paying upfront, the lender may add the fees to the principal of your mortgage loan — or simply hike your interest rate. Either way, you’re paying, and the fees will be pricier due to interest accrual than if you were to have paid them upfront.

Mortgage closing cost FAQs

Can you roll closing costs into mortgage loans?

Yes, there are two popular ways to "roll" closing costs into the mortgage. One is to ask your lender to cover the closing costs in exchange for a higher interest rate. The other is to ask your lender to add the closing cost amount to the principal balance of your mortgage.

Who offers no closing cost mortgage loans?

Not all lenders offer "no closing cost" mortgage loans. But even if it's not advertised, your lender may be willing to do so if you negotiate. Some lenders, like PNC and Bank of America, have established loan programs that cover up to $7,500 of closing costs -- more than enough in most cases to cover 100% of closing costs.

What's the difference between closing costs and "cash to close"?

The phrases closing costs and cash to close are sometimes conflated. Closing costs may include property taxes, administrative fees, attorney fees, and other expenses due at closing. The "cash to close" amount is your down payment plus your closing-cost-related expenses.

Who pays the closing costs?

Both homebuyers and sellers pay closing costs, but the phrase is typically used to describe the expenses the buyer has to pay at closing, as the closing costs are much higher for the buyer than the seller. It's possible, though, for the buyer to negotiate and get the seller to pay a substantial portion—and in some cases, all—of the closing costs.

Summary of Money’s guide to mortgage closing costs

• Closing costs usually refer to an assortment of fees that a homebuyer has to pay at the time of closing — in addition to the down payment.

• Typically, home closing costs run between 2% and 5% of the home's purchase price. The national average is about $7,000, though that can vary widely depending on your location.

• Common closing costs include mortgage lender fees, home appraisal and inspection costs, attorney and legal expenses, and more. Your loan estimate and closing disclosure forms are crucial tools for understanding what you’re paying for your new home, when, and why.

• Closing costs can be substantial in some cases, and trying to negotiate with the seller and your mortgage lender is always worth it.

• If you truly can’t afford the closing costs upfront, you may want to consider a “no closing cost” mortgage. But beware: you will pay those expenses via higher interest rates or a larger loan amount.

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