Mortgage closing costs are typically 2-5% of your loan amount, with a smaller percentage for larger loans.
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Closing costs are a collection of fees required to set up and close a new mortgage. They can range from 2-5% of the mortgage amount for both home purchase and refinance loans.
closing day. Closing fees are paid to an independent escrow company, which handles distributing each fee to the right party. This is much easier than having borrowers pay each cost separately.
Note that closing costs are separate from your down payment, though some lenders may combine them into a single number on your closing documents.
The good news is that many mortgage closing costs are flexible. So borrowers can shop around for the lowest fees, and even negotiate with their lender to reduce certain items.
The key is to get offers from at least a few different lenders so you can see the range of closing costs for your loan and which company is most affordable.
Closing costs include just about every upfront fee to purchase or refinance a home, except for the down payment.
These premiums are technically part of your closing costs on an FHA, VA, or USDA loan. But you’re allowed to roll them into the loan balance (even on a home purchase loan), and most borrowers choose this route to avoid the extra upfront charge.
Conventional loans with less than 20% down charge for private mortgage insurance (PMI). But unlike government loans, there’s no upfront charge; only a monthly premium.
In 2021 (the most recent data available), the average closing costs for a single-family home were $6,837.
All lenders use standard loan forms called the Loan Estimate and Closing Disclosure.
Loan Estimate (LE) after you apply. This document will list your loan terms, interest rate, and every closing fee associated with the offer.
All Loan Estimates use the same format, making it easy for you to compare rates and fees to find the best deal.
You can also use your Loan Estimates as leverage. If one lender offers a great rate but another offers lower fees, you can bring your low-fee estimate to the first lender and see if it will reduce your costs.
The second document you will receive is the Closing Disclosure (CD).
Lenders are required to send you a CD at least three business days before your closing date. This document will list the final details of your mortgage — which should closely match the rate, terms, and closing costs on your initial Loan Estimate.
There are legal limits to the amount your closing costs can increase on the CD. If you see a change in your fees before closing, be sure to bring it up and get an explanation.
You’re never committed to a mortgage until you sign — so before you do, make sure you’re getting the deal you were promised.
Mortgage closing costs fall into three categories: lender fees, third-party fees, and prepaid items.
These are fees charged by the lender or broker to underwrite, process, and close your loan. They include:
Third parties don’t work for mortgage lenders, but they provide services necessary to complete the transaction. These services include the following:
Prepaid items are costs of homeownership for which you pay upfront when you close the loan.
The lender needs to guarantee 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 tax foreclosure, fire, or another hazard.
Prepaid items go into an escrow account or “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 high price tag on closing costs often takes first-time home buyers by surprise. If you budgeted for a low down payment — say, 3% — closing costs could double your out-of-pocket expenses.
Lender credits are an arrangement where the mortgage lender covers part or all of your closing costs. In exchange, you pay a higher interest rate. This is also known as a “no-closing-cost mortgage.”
A no-closing-cost loan will likely cost you more in the long run due to higher interest.
But for home buyers on a budget — and refinancers getting a significantly lower rate — this strategy can be a smart way to get the loan you need without having to empty your savings.
A seller concession is when the seller covers part or all of the buyer’s closing costs. The seller does not pay out of pocket; rather, they use part of the proceeds from the home sale to cover the buyer’s fees.
This strategy works best in a buyers’ market where homeowners are motivated to sell. Sometimes, the buyer must agree to a higher purchase price for the seller to agree to pay their closing costs.
Note: There are limits on the amount of closing costs a seller can pay for, which vary by loan type.
If you’re refinancing, you might have the option to roll closing costs into your loan balance. (This is only an option on refinance transactions; not purchase transactions.)
Rolling closing costs into the loan means you’ll pay interest on them, so they cost more in the long run. But if you don’t plan to keep the loan for its full term, your monthly savings from refinancing might be more important than the long-term cost.
Not all closing costs can be included in the loan amount. For instance, prepaid items like property taxes and homeowners insurance must always be paid upfront.
Rules vary by loan type, too. On an FHA Streamline Refinance, for example, only the upfront mortgage insurance fee can be rolled into the loan balance. All other closing costs must be paid upfront.
Closing cost assistance is available from state housing finance agencies (HFAs) and some local governments, lenders, and nonprofits. This typically comes in the form of down payment assistance, which can be used to help pay for your down payment and/or closing costs.
Closing cost and down payment assistance can be a grant (which never needs to be repaid) or a loan (which often has low or no interest and may be forgivable).
These programs are often targeted toward first-time and/or lower-income home buyers. But specific rules and requirements vary a lot by program.
Your real estate agent or loan officer can help you find down payment and closing cost assistance in your area.
The final tool in your belt is negotiation.
As a borrower, you can shop around with as many mortgage lenders as you want. You can choose the one with the lowest closing costs outright, or you can take your best offer and ask another lender to match or beat it.
With a little time and dedication, it’s possible to get mortgage lenders to compete for your business.
You’ll have even more bargaining power if you have an excellent credit score and large down payment; in other words, if you’re a ‘prime’ borrower.
Just note, not all 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 loan pricing is flexible. You can choose the fee structure that works best for your financial situation.
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 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.
Is it worth it to pay more up front for a lower rate? Or to eliminate closing costs but accept a higher rate?
You can determine if this is a good deal or not by looking at the ‘break-even point’ on your new loan. That’s the point at which your monthly savings outweigh your upfront costs.
Here’s an example of how discount points and rebate pricing might compare for a $250,000 home loan.
| No Points | Rebate Pricing (1 Point) | Discount Pricing (1 Point) | |
| Loan amount | $250,000 | $250,000 | $250,000 |
| Quoted interest rate | 4% | 4% | 4% |
| Closing cost | No added cost | -$2,500 (paid back to you) | +$2,500 (paid to lender) |
| Actual interest rate | 4% | 4.25% | 3.75% |
| Monthly payment | $1,269 | $1,305 | $1,233 |
| Total interest paid (30 years) | $179,700 | $192,750 | $166,800 |
In this example, spending an extra $2,500 for one discount point saves you $36 per month, or $12,800 over 30 years.
With these savings it would take you almost six years to break even with the extra closing costs you paid — so you’d have to stay in the house quite a while to make that discount point worth it.
With rebate pricing, on the other hand, you save $2,500 at the closing table. But you pay $36 more per month thanks to the higher interest rate. That adds up to an extra $13,000 over the 30-year loan.
So if you plan to stay in the house 6 years or more in this scenario you’re actually losing money with rebate pricing.
Shopping for a mortgage is about more than just an interest rate.
It’s equally important to compare upfront fees and find the lender that’s most affordable overall — not just the one with the lowest rates.
Luckily, lenders are required by law to provide a Loan Estimate listing every closing cost associated with their mortgage offers.
Use these documents to find the best deal, and you could save thousands over the life of your loan.
Authored By: Gina Freeman The Mortgage Reports contributorWith more than 10 years in the mortgage industry, and another 10 years writing about it, Gina Freeman brings a wealth of knowledge to The Mortgage Reports as its Associate Editor. Gina works with a team of world-class real estate and finance writers to bring timely and helpful news and advice to the audience. Her specialty is helping consumers understand complex and intimidating topics.
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