What are Mortgage Closing Costs?
Point of Interest
If you’re thinking about taking out a mortgage to buy a home, you’ll probably hear the term “closing costs” a lot during the process. These costs are the fees that come with taking out a mortgage, and include costs like the title search fee and appraisal fees, among other things.
When it comes to closing on a home purchase or refinance, the one constant is that you will owe closing costs on the mortgage loan at the time you close on it. Closing costs are a catch-all term for the final fees associated with taking out a mortgage — and they can add up. In 2019, the average closing cost amount for single-family homes was $5,749 including taxes.
But that’s just the average. Ultimately, the total amount of closing costs vary by the size and type of loan, the lender’s costs and other factors, which makes these costs difficult to predict ahead of time.
Still, while it’s nearly impossible to calculate the exact closing costs on your mortgage without talking to your lender, there are some key factors you can consider to help you understand how much it will cost to finalize your mortgage. Understanding what the typical closing costs are — and aren’t — may even help you save on closing costs altogether.
What are closing costs?
Closing costs include all the fees and taxes associated with taking out a mortgage. This will usually be somewhere between 2% to 5% of the loan amount and will vary depending on where the house is located.
As a borrower, you’re entitled to a loan estimate, which should be given to you within three days of the lender receiving your application. The estimate should give you an approximation of your closing costs.
Once you’re closer to closing on the loan, you should receive an itemized closing disclosure within three days of your scheduled closing date with the final amounts for closing. The number you see on that disclosure will be your final closing cost amount — the sum of many different costs and fees.
These fees include:
- Lender fees — Lender fees can include application fees, credit report fees or other handling fees charged by the lender itself. Lenders often include an origination fee for administrative costs that usually amounts to 1% of the loan along with an underwriting fee. Some lenders may also require you to prepay your first year of homeowner’s insurance and private mortgage insurance if your down payment is lower than 20%.
- Title fees — These costs are paid to the title company that helps facilitate the mortgage. They may include a closing or “escrow” fee, title insurance and a title search fee. While not paid to the title company, you may also pay a tax on transferring the title from the seller.
- Other costs — These include upfront property taxes and costs associated with the house itself, such as property appraisal and inspection fees. Depending on the house, you may also need to pay for a lead-based paint inspection and flood determination fee. Some homeowners associations will also charge fees at closing. Additionally, some government-backed loans will have specific costs added on as well.
The most common fees to see on your closing disclosure are:
- Loan origination fees
- Appraisal and survey fees
- Title insurance
- Homeowners insurance
- Private mortgage insurance (PMI)
- Mortgage points
- Property tax
- Closing or escrow fee
- Attorney fees
- Miscellaneous fees like credit checks or fees to local entities to register the property
Tip: Depending on your state laws, some fees may be paid to an attorney rather than a title company or other entity.
While closing costs may seem overwhelming, having an itemized breakdown will help you sort through each one to figure out where your money is going. If you aren’t sure why a lender has added on a particular fee, ask them about it directly. Reviewing your closing disclosure can prevent you from paying more than you have to, and you may even have room to negotiate administrative fees with the lender.
You’re also not locked into a mortgage once you receive your initial estimate for closing costs, so you can still compare prices and shop around if you feel that you’re being charged too much. If you’re worried about affording closing costs up front, some lenders will let you add your closing costs to the loan principal so that you can pay it off monthly instead. This is especially common with refinances.
The final word
Closing costs are fees paid to all parties involved in closing on your home. This could include attorneys, lenders, title companies and other entities like local governments. What this looks like exactly will depend on the house you’re buying, your lender’s loan approval process and where you live.
Closing costs may feel burdensome, but knowing what to expect can help you feel more confident that you can identify any unnecessary charges when you get that itemized list. Don’t be afraid to price compare and ask your lender about reducing specific fees and costs to make sure you’re getting the lowest closing costs possible.