Guide to mortgage closing costs: Average mortgage costs and how to keep yours low

Gina Pogol
The Mortgage Reports contributor

In this article:

Home buyers should expect to pay anywhere from 2 to 5 percent of the cost of their home in closing fees.

  • Most lenders combine all the miscellaneous smaller charges into one origination charge for simplicity. Other charges may include title company fees, HOA fees, and home appraisal fees
  • Your ability to negotiate certain closing costs depends on the location of your property. A standard form called the Loan Estimate will detail which items you can shop for
  • You can negotiate lender charges anywhere. The biggest lender charge is usually the origination fee.

Closing costs when you buy or refinance a home

This guide provides a complete list of the most common closing costs, average closing costs by state, and tips on what you can do to minimize them.

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How much are closing costs?

Closing costs typically equal between two and five percent of the home price or, in the case of refinances, the loan amount.

For bigger transactions, the percentage tends to be smaller, and vice versa.

For instance, a $500,000 home purchase may require closing costs of around $10,000 (two percent), while a $100,000 property could cost you $5,000 in closing costs or more (five percent plus).

Following is a list of common charges and what you’re likely to pay for them.

Mortgage lender charges

Here is a list of fees that mortgage companies may charge. However, it doesn’t matter what lenders call the fees. They all go to the lender, and it’s the bottom line that counts. You could call every charge listed below a different flavor of ice cream, and it wouldn’t matter. It’s the total that counts, and that figure may be negotiable.

Origination fee – 0-1% of the loan amount

Most lenders (or mortgage brokers) combine all the miscellaneous smaller charges into one origination charge because it’s easier for them. It’s easier for you, too, because you don’t have to add up the individual items and compare them yourself.

Getting sellers to pay your closing costs

But some charge an origination and add more charges (called “garbage fees” in the industry). That’s why only the bottom line really matters. One lender might charge a 1 percent origination fee for a $100,000 loan. Another might charge $1,000 in miscellaneous fees. The bottom line is equal.

Broker fee – 0 – 1% of the loan amount

This is essentially the same thing as an origination fee, but charged by a mortgage broker.

At no time should a broker or any mortgage provider charge both an origination fee and a broker fee.

Discount fee – 0-1% of the loan amount

“Discount fee” is a misnomer because it actually adds to your closing costs instead of discounting them.

The term “discount” means you get a discounted rate because you pay more upfront.

Related: Mortgage discount points explained in plain English

For instance:

  • 5% loan at zero discount points
  • 4.75% loan at 1 discount point (1% of the loan amount)

Discount points are different than origination charges because discount points must be used specifically to lower your rate.

Being able to choose your price can help you get the best loan for your needs. For instance, you might decide to pay discount points if you plan to own the home and keep the mortgage for 15-30 years. If you decide to keep the home or mortgage just a few years, discount points are usually a waste of money.

Processing fee – $300-$750

If not wrapped into the origination charge, this fee covers the cost of obtaining your documents. For example, processors may call your employer to confirm your job, send verification forms to banks to prove your assets, copy, and organize and submit your application package to underwriters. They also order appraisals, take your application, and perform other functions.

Underwriting fee – $300-$750

Your loan may be underwritten electronically by automated underwriting systems (AUS), or manually by a human (more common if your application requires some flexibility for approval, or if your documentation is insufficient).

Even if you get an approval from an automated system, a human underwriter must verify that, for example, your actual pay stub reflects the income that you indicated on your application. It’s a labor-intensive business.

Courier fees, administrative fees, and other miscellaneous charges – $100+

You’re more likely to see these wrapped into an origination charge, but if not, these charges can add several hundred dollars to your bill. And how many times does a lender in this century use a courier anyway?

Lock-in fee, Application fee – $200 – $500+

Honestly, these are junk fees that are meant to increase the lender’s revenue and little more. Locking in a loan and applying should be covered by the origination fee since they are a mandatory part of the process.

In some states, charging an application fee or any upfront, non-refundable fee is illegal. Be wary of any lender who makes you pay to apply. This is a tactic to make money off the application process, and can deter you from shopping for a better rate with another lender.

Loan Level Price Adjustments (LLPAs)- 0-4% of the loan amount

Lenders can add surcharges (aka “add-ons”) for higher risk transactions, or for making exceptions to their normal underwriting guidelines. For instance, Fannie Mae has an entire list of Loan Level Pricing Adjustment (LLPA) matrix. LLPAs are typically paid for via a higher rate, not out-of-pocket. Still, it’s important to know that they are there.

The lender doesn’t make money from these charges. They are simply what the secondary investor market requires for various loan features, like lower credit scores and investment properties.

When you compare loan offers, you give every lender the same information, so that you get a meaningful quote you can compare to other offers.

Loan Level Pricing Adjustments (LLPA):  a complete guide

Summing up lender charges

For lender charges, there’s only one line you need to know — the total. Note that if your loan amount is smaller, you may pay less if the lender wraps all charges into an origination fee (usually, but not always, 1 percent of the loan amount) than you would if you paid separate fees of several hundred dollars each. On the other hand, many lenders avoid losing money on smaller loans by adding a “low loan amount” surcharge.

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Third party charges

Third parties don’t work for mortgage lenders, but they provide services necessary to complete the transaction. These services include to following.

Title report / title insurance policy – $300 – $2,500+

Title companies or real estate attorneys check property records to make sure that the seller has the right to transfer ownership to you, or that you have the right to refinance the home. Records go back generations and are not always digitized, so this can be a time-consuming process.

Title insurance for mortgages: explained in plain English

There are two kinds of policies, both of which are required:

  • Lender’s policy. This protects the lender’s interest in the house you’re buying
  • Owner’s policy. This protects the soon-to-be owner (you). If someone makes a claim to the house or property and wins in a court of law, this policy reimburses you the value of the home you lost.

In some areas of the country, the seller pays the owner’s policy and the buyer pays the lender’s policy. However, this is determined by local custom. Make sure your purchase agreement defines who pays what. If the buyer is supposed to pay both, it could dramatically increase your bottom-line closing costs.

The cost for the lender’s and owner’s policies depend on loan amount and purchase price of the home. An inexpensive home might come with title fees in the hundreds of dollars, where luxury homes or a ones in an expensive area can come with title fees in the thousands.

Escrow fee – $350 – $1,000+

Escrow services help facilitate the transaction, receiving your out-of-pocket funds, borrowed funds, and money from the seller.

At closing, the escrow officer or attorney creates closing statements and distributes funds as needed — real estate commissions to the agents, loan fees to the lender, taxes and other fees to the county, charges to third-party providers like the appraiser, and profit from the sale to the home seller.

The escrow company also facilitates document signing. You’ll visit the escrow office toward the end of your transaction.

Perhaps the most important job of escrow: final recording of all documents with your county or other local government entity. This ensures your ownership is “on the books” with the local government, therefore leaving an undisputable record of ownership.

Escrow fees vary greatly based on the home’s purchase price, hence the wide range of this fee.

Appraisal – $500 – $1,000+

You’ll most likely need a “full appraisal” which requires an appraiser to visit the home, walk through, and take pictures. This typically comes with a fairly hefty fee.

In some cases, your lender may require a limited appraisal, which may require just driving by the home and taking a picture of the outside. Or, better yet, an automated valuation, performed completely online by the lender. These options are much cheaper.

How can I avoid a home appraisal when I get a mortgage?

Appraisers use public data to check the home’s sales history, pricing trends in the area, the balance between supply and demand, zoning, and other numbers that affect values. They compare the property to nearby recent sales of similar houses — square footage, condition, site (nicer views are worth more), quality of construction, and both desirable and undesirable features that affect the property marketability if the lender has to foreclose and sell.

Appraisals cost a few hundred dollars to over $1,000, depending on the size and uniqueness of the home.

Credit report fee – $35

Credit bureaus compile your credit history from creditors, collection agencies, public records (judgments and liens) and other sources, and use their own formulas to create a credit score. The most commonly used scores in mortgage lending come from FICO. Your lender will probably pull a merged report with scores from at least two of the top three bureaus — Experian, TransUnion and Equifax.

However, if your credit report is unusable due to identity theft or lack of information, the lender may have to commission a manual credit report — a report compiled by humans verifying accounts like your rent, utility payments and other sources. Costs for manual reports are higher.

Flood certification – $20

Flood certification indicates what level of flooding danger threatens your property. The federal government assigns flood zones to areas, and some of those are more prone to flooding than others. If you’re in a flood zone, you’ll have to purchase flood insurance to get a mortgage.

If your property is in a flood zone but high enough that it is not in danger of flooding, you can initiate an “elevation certificate” to prove you don’t need flood insurance. Note that an elevation certificate requires commissioning an engineer to evaluate the home’s elevation, and can cost $350 or more.

Recording fee – $20 – $250

Your county charges fees to process the records when a property changes hands, and you’ll likely pay a tax as well. This tax goes by many names: real estate conveyance, mortgage transfer, documentary stamp, or property transfer. It ranges from zero (Alaska) to 3 percent of the property value (Delaware), according to the National Conference of State Legislatures. 

Survey fee – $400+

In some cases, the lender requires a professional surveyor to determine property lines. Fortunately, this is not required often, because it can be expensive.

Attorney fees – $400+

Closing attorneys are not required in every state. Where they are required, find an inexpensive one that specializes in real estate. Attorneys can also facilitate the closing and negotating the contract.

HOA – varies

If you buy in a homeowners association, you’ll probably pay for a copy of the Covenants, Concessions and Restrictions (CC&Rs), a fee for the property manager to complete a condo survey for the lender, and a fee to transfer ownership records.

This is a fairly recent trend, and while the association may technically make the seller responsible for this cost, in a seller’s market, it might become yours. Even if your seller pays it, understand that you’ll be dealing with it in the future when you sell your home.

Some HOAs even charge a fee to all new residents equalling thousands of dollars. Make sure you understand all your HOA costs before making an offer on a property within an association.

Tax service fee – $50

The tax service is not a government requirement, even though it sounds like one. Tax service companies simply keep track of your property, making sure that you pay the taxes when due. It protects the lender, and you should probably ask for a waiver if the lender will be impounding your taxes with your monthly payment.

Notary fee – $100

In many cases, you can sign final loan documents at your home, at a Starbucks, or your workplace. The escrow company will hire a notary, a person who will travel to where you are, and has the authority to certify the signatures.

Closing Protection Letter (CPL) fee – $50

A fee charged by escrow to create a CPL – a document that puts liability on the title company if the escrow does not disburse the home purchase funds appropriately.

Document prep fee – $50

The fee that the escrow company charges to prepare the final loan documents for signature.

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Prepaid items

“Prepaid items” are costs of homeownership for which you pay upfront when you close the loan.

The lender needs to guarantee that you will pay things like property taxes and homeowners insurance. So, in most cases, they collect these costs at closing and monthly, then pay them for you, to make sure the home isn’t at risk of a tax foreclosure, fire, or another hazard.

Prepaid items go into an “impound account” which isn’t as bad as it sounds. It simply means the lender has set up a holding place from which to pay the expenses you would have to pay anyway.

Property tax reserves – $500 – $2,500+

Property taxes go into an “impound account” which isn’t as bad as it sounds. It simply means the lender has set up a holding place from which to pay the expenses you would have to pay anyway.

The lender “front loads” the impound account with two to six months’ property taxes. That can increase your closing costs by more than you anticipated, since property taxes alone can be upwards of $500 per month in some areas.

Related: How to avoid having an impound account with your mortgage lender

Know the exact monthly tax amount for the property you’re buying, then estimate prepayment of six months just to be safe.

Homeowners insurance – $400 – $1,000+

Like property taxes, the lender collects homeowners insurance premiums upfront. This ensures the home will be rebuilt if taken by fire or another hazard.

The lender collects 12-14 months of insurance premiums. So as soon as you find a home to buy, request a homeowners insurance policy from an insurance agent, then expect to pay the yearly cost upfront, plus a bit more. Pro tip: check with the insurance provider who also carries your car insurance. This can save you money on both. It’s also a good time to shop around for new auto and home insurance. Some companies give deeper discounts for having both policies with them.

Flood insurance – $300 – $1,000+

This only applies if the flood certification (see “third party fees”) shows that the home is in a flood zone. First, consider whether you really want this home if it is susceptible to flooding. Even with insurance, count on big costs and hassle if the home floods.

By the way, your standard homeowners insurance policy doesn’t cover flooding.

If you decide to move forward, you will need to pay at least one year’s worth of flood insurance premiums upfront. This will be an ongoing cost as well, since the lender will collect 1/12 of the yearly premium with your mortgage payment.

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Which closing costs are negotiable?

Your ability to negotiate certain closing costs depends on the location of your property. Your Loan Estimate will detail which items you can shop around for (labeled “section C”).

Mortgage lender charges

You can negotiate lender charges. These include:

  • Mortgage origination fee
  • Other fees like underwriting, processing, and funding, which go directly to the lender. Don’t get too wrapped up in what the fees are called; just negotiate the bottom line for lender charges.

Some fees are merely collected by the lender for required services, and can’t be negotiated with the provider. These include appraisal charges and credit reporting fees.

Related: Make the most of your closing disclosures

However, the lender can cover them for you if you desire. But the more fees you want your lender to cover, the higher your interest rate is likely to be.

Title and escrow charges

Other services you may be able to shop for include title insurance and escrow services. You’ll want to compare charges from several companies because, in states that allow you to shop, fees and premiums can vary by thousands of dollars.

Note that if the house was purchased or refinanced within the last few years, you may qualify for a “short rate” or “discounted” premium.

Related: 4 ways to keep mortgage closing costs low

If you purchase lenders and owners policies from the same provider, ask for a “simultaneous issue” discount.

In Florida, New Mexico, and Texas, title insurance charges are set by regulations. NY, PA, NJ, OH, and DE also have uniform rates. However, extra fees like mail and courier charges, copy fees, and costs for searches and certificates can be negotiated. Just call the title insurance company and ask to remove the fees, and if they refuse, look for another provider.

Title service fees show up in section B or C of page 2 of your Loan Estimate. If they appear in section C, you can shop for them — and you should.

How to negotiate the lowest closing costs

Your mortgage lender and real estate agent probably have providers they routinely work with. These companies may also offer the best pricing. However, no one is going to care about your out-of-pocket costs as much as you do, so if you can shop for an item, you probably should.

Related: “No closing cost” mortgages

Even where there are no differences in pricing for title, escrow and other services, you may be able to negotiate to have the mortgage lender or home seller pay them. Note that all things being equal, a loan with the lender covering your other charges will have a higher interest rate than one that does not.

This is closely related to the section above. You can choose several cost structures for a given loan. That includes the loan with the lowest rate (and highest cost) and one with no charges, or even rebate pricing.

Rebate pricing

Rebate pricing allows the lender to take your mortgage rate higher in exchange for crediting an amount to you. You can use the rebate to cover other closing costs — even prepaid items like property taxes and insurance premiums.

So a loan with “minus three points” could credit you with up to 3 percent of the loan amount for other costs. On a $200,000 mortgage, that’s $6,000.

Rebate pricing is ideal for those who only plan to stay in the home or mortgage for a few years. You take a higher interest rate for a short time in exchange for very low upfront costs.

Discount pricing

“Discount” pricing doesn’t mean lower charges. It actually refers to the extra fees you might pay to “buy down” your rate. Discount points add to your closing costs but reduce your interest rate.

Breaking even

You can determine if this is a good deal or not by comparing the costs and monthly payment. See how long you have to keep a more expensive loan for the lower payment to offset the higher cost.

Here is an example of a $200,000 mortgage.

  • 5.0 percent rate = 0.75 percent (1 percent origination fee – 0.25 percent rebate). Mortgage payment is $1,073
  • 4.50 percent rate = 2.0 percent (1 percent origination fee + 1 percent fee for a lower rate). Mortgage payment is $1,103
  • 4.0 percent rate = 3.0 percent (1 percent origination + 2 percent fee for a lower rate). Mortgage payment is $954

In other words, spending an extra $4,500 saves you less than $120 per month. That’s a breakeven point of more than 3 years.

Shopping for a mortgage is about more than just an interest rate. By comparing the costs versus your payment, you can arrive at the best combination of interest rate and upfront costs to meet your needs.

Find the lowest closing costs

Getting a good combination of low rate/low fees is essential when shopping for a home. You will have plenty of expenses as it is without unnecessary charges added.

Shop around by checking with at least three lenders

Verify your new rate (Nov 16th, 2019)