Mortgage Closing Costs: What They Are and How Much You’ll Pay
If you’re buying a home and need a mortgage, you’ll need to budget for a down payment and mortgage closing costs. If you’re refinancing your home, the dollars you pay for closing costs can make or break the benefit of a refinance loan. Knowing what the fees are and who pays what may help you reduce or even avoid paying more than you have to at the closing table.
What are mortgage closing costs?
Mortgage closing costs are fees paid directly to the lender and their business partners when you take out a home loan. They are the price tag for borrowing money, and often vary from company to company. They make up a substantial portion of the total closing costs charged when you get a mortgage to buy or refinance a home.
You should pay close attention to mortgage fees on a loan estimate when you’re comparison shopping for the best home loan. You can, and should, haggle with loan officers or mortgage brokers to get the lowest rate with the least mortgage closing costs.
Keep an eye on third-party closing costs like title fees, credit reports and appraisal costs. Although you might not be able to shop for some of these types of costs directly with your lender, you may find they are lower from lender to lender.
How much are typical mortgage closing costs?
Recent data show you’ll shell out more closing cost cash to buy a home versus refinancing one. The table below highlights average closing costs for buying and refinancing in 2021.
|Purchase mortgage closing cost highlights*||Refinance mortgage closing cost highlights**|
*According to Corelogic’s 2021 Purchase Closing Cost Report, not including transfer taxes.
**According to Corelogic’s 2021 Refinance Closing Cost Report, not including specialty taxes.
Types of mortgage closing costs
Your loan estimate is the most important document to review when you’re comparing closing costs. This three-page form provides a detailed breakdown of costs you might pay for a purchase or refinance mortgage.
We’ll cover the costs in the same order you’ll find them on your loan estimate.
You’ll find loan costs under the heading “Origination Charges” on Page 2 of your loan estimate. These are the fees charged by your lender in order to approve your loan and are calculated as a percentage of your loan amount. For example, if you borrow $300,000 with a 1% origination fee, the origination cost is $3,000. The following costs are typically included in a lender’s origination fee estimate:
- Origination. When a lender makes a new loan, it’s called an “origination” and the costs to fund the loan, as well as the fee paid to your loan officer, are reflected in this fee. There may be a documentation preparation fee for the processing of your closing paperwork. There shouldn’t be any fee for a mortgage rate lock unless you need to secure your rate for more than 60 days.
- Application or administration fee. An upfront fee to begin processing your paperwork for final approval. May also be charged at closing.
- Discount. Also called a mortgage point, this is a percentage of your loan amount charged upfront to buy a lower interest rate.
- Underwriting fee. This fee is charged to pay the person who approves the loan.
Services you can’t shop for
These fees are paid to third parties, such as appraisers and credit reporting companies. Although you can’t shop for them at an individual lender, you can compare what they add up to when you total all of the other mortgage costs. Fees in this category include:
- Appraisal. The home appraisal fee is charged to have a professional property appraiser give an opinion of value for the home you’re buying or refinancing.
- Credit report. Cost to verify your credit history and score.
- Flood determination fee. The flood determination fee is for checking whether the property is in a flood zone.
- Flood monitoring fee. An additional fee may be charged for monitoring the flood status of a property, depending on the flood determination.
- Tax monitoring fee/tax status research fee. Lenders want to make sure property taxes are kept current so this fee sets up a service to verify the status of property tax payments.
- Mortgage insurance premium. Mortgage insurance protects lenders against losses if you default on the loan, and is required for most conventional loans with less than 20% down. Government-backed loan programs may charge upfront fees based on a percentage of your loan amount. Lenders who offer Federal Housing Administration (FHA) loans may charge an upfront mortgage insurance premium (UFMIP) of 1.75% of your loan amount for protection against losses, and mortgage insurance is required on all FHA loans, regardless of the down payment amount.
- VA funding fee. Military borrowers must pay a funding fee as high as 3.6% for a loan guaranteed by the U.S. Department of Veteran Affairs (VA). VA loan closing costs include a funding fee instead of mortgage insurance to offset the cost of the program to taxpayers.
Services you can shop for
You should receive a list of approved providers from your lender, but your ability to shop for title fees may be limited when it comes to buying a home, which we’ll discuss later.
- Pest inspection. Some lenders and loan types (like VA loans) require a termite inspection, which you can shop around for.
- Property survey. It’s rare that lenders will require a survey unless there’s a dispute over property boundaries. Surveys cost an average of $375 to $744, according to HomeAdvisor.
- Title insurance binder/lenders title insurance. A lender’s title insurance policy protects your lender from any past title problems with your property, such as liens, unpaid taxes or a contractor suing for unpaid work.
- Title settlement fee. This may also be called an escrow or attorney’s fee depending on where you live, but it’s charged to cover the expense of the person who helps prepare and guide you through the process of signing your paperwork at closing.
- Title search. There may be an extra fee for checking the title history on your property.
Non-mortgage closing costs
The “Other Costs” section of your loan estimate breaks down how much you’ll need for the ongoing costs of homeownership, such as property taxes and government fees. Ignore these fees when you’re comparing lenders — you’ll ultimately pay the same amount regardless of the lender you choose.
However, you do need to make sure you have funds on hand to cover these fees if they apply to the type of home you’re buying.
Taxes and other government fees. These fees are set by the state you live in and vary by location. They include recording fees charged to change the ownership or lien information in public records, and transfer taxes, which are charged when ownership is transferred to a new owner.
Prepaid fees. You’ll pay these costs before they’re actually due. For example, your homeowners insurance has to be prepaid before you actually own the home so that it’s insured when you close. Other costs that may be included in the prepaid fee section include:
- Mortgage insurance if your loan requires it
- Prepaid interest on your new loan
- Property taxes
Initial escrow payment at closing. Your lender can set up an escrow account to pay ongoing housing expenses such as homeowners insurance, mortgage insurance and property taxes as part of your monthly payment. The costs in this section reflect how much money they’ll collect at closing to set up the escrow account when you buy or refinance a home.
Owner’s title insurance (optional). An owner’s title insurance policy covers you (the new homeowner) against any ownership disputes or claims. You can pay this fee or request that the seller pay it. The cost of the owner’s title insurance depends on your location, loan amount and home sales price. Title insurance fees tend to be lower for refinance transactions.
How to reduce or avoid closing costs
Closing costs can add up fast, but you can negotiate who pays them. You can also roll them into your mortgage. Here are some options to consider.
- Shop and haggle. A recent LendingTree study found nearly half of mortgage seekers who shopped saved money.
- Get a lender credit toward closing costs. Loan officers may suggest a low-closing-cost or no-cost mortgage, where you accept a higher interest rate and use a lender credit to cover all or some of your costs.
- Roll the costs into your loan. This is more common with mortgage refinancing and involves increasing your loan amount to cover some or all of your costs. (Note: Choosing a no-cost mortgage and adding closing costs to your loan amount will result in a higher monthly payment and more interest charges over the life of your loan.)
- Ask the seller to pay. The seller can give you a credit to pay for closing costs. The table below shows the maximum percentage you can ask for based on the loan program. You can ask the seller to cover a higher percentage of closing costs with a bigger down payment on a conventional loan.
|Loan program||Maximum percentage of sales price seller can pay|