How Much Are Mortgage Closing Costs?

Mortgage closing costs are the various fees associated with finalizing a home loan. These costs are paid at closing and can add thousands of dollars to the total cost of buying a home. According to data from ClosingCorp, the average closing costs for all mortgages in the United States in 2023 are $6,922.

However, closing costs can vary significantly based on the loan amount, loan type, lender, and geographical location. Being aware of the average costs and strategically navigating closing fees can help buyers effectively manage expenses when purchasing a home.

What Encompasses Mortgage Closing Costs?

Mortgage closing costs encompass all the various fees and charges associated with finalizing a home loan. These expenses are directly related to processing, underwriting, and closing the mortgage. When a borrower goes to close on a property, they will need to pay these costs upfront. 

The specific closing costs a buyer will pay depends on several factors like the mortgage lender, loan amount, location, and loan program. However, some general categories of closing costs include:

• Origination charges – Fees like application fees, underwriting fees, and lender fees for processing the loan. As per the Consumer Financial Protection Bureau (CFPB), the origination fee is often the largest closing cost, ranging from 0.5% to 1% of the total loan amount.
• Appraisal fee – The cost of hiring a professional appraiser to evaluate the property being purchased and determine its market value. Appraisal fees often range from $300 to $400 on average.
• Credit report fee – The charge for the lender to obtain a copy of the borrower’s credit report. This usually costs around $50-$100.
• Title services – Includes title insurance, title search, document preparation fees and more. On average, title services can cost around $700-$1200.
• Taxes and insurance – Includes prepaid property taxes, homeowner’s insurance premiums, and sometimes mortgage insurance premiums (with FHA loans).
• Government recording charges – Fees paid to the local government to legally record the property transfer and mortgage documents. This averages around $200-$600.
• Interest charges – Prepaid interest charges to cover the first month after closing. Usually comes out to a few thousand dollars.

While this covers the major categories, closing costs can also include fees like home inspection charges, escrow deposits, real estate agent commissions, and more. Many first-time homebuyers are surprised by how high closing costs can be. However, being aware of the common costs helps buyers budget accordingly.

What Are the Different Elements of Closing Costs?

Let’s take a closer look at some of the key elements involved in mortgage closing costs:

Application and Origination Fees

One of the first fees a borrower will encounter is the loan application fee. This is typically around $50-$100 just to apply for the mortgage. The loan origination fee is often the largest closing cost, ranging from 0.5% to 1% of the total loan amount (Source: CFPB). This covers underwriting and processing. On a $250,000 loan, origination fees would amount to $1,250 to $2,500. Lenders also charge separate fees for preparing loan documents or other administrative tasks.

Appraisal and Credit Report

Lenders will require an appraisal to value the property, typically costing $300-$400. The CFPB notes that the median appraisal fee is $364. Getting a copy of the borrower’s credit report also incurs a small fee, normally under $100. However, these two costs provide critical information to the lender for underwriting the loan.

Title Services

Title insurance and title searches help protect both the lender and homebuyer from claims against the property. A title search verifies no other party has legal rights to the property. Title insurance covers financial losses if claims emerge. The CFPB puts average title service fees around $700-$1200. There may also be charges for document preparation and settlement services to finalize the transaction. 

Taxes and Insurance

Closing costs include several months of prepaid property taxes and homeowner’s insurance to ensure these payments after closing. Mortgage insurance is required for conventional loans with less than a 20% down payment and on all FHA loans. On a $200,000 home, mortgage insurance could add over $100 per month or around $1200 annually. Taxes, insurance and upfront mortgage insurance premiums can easily amount to thousands at closing.

Recording Fees and More

Government recording fees to file property records are typically around $200-$600 (Source: Bankrate). Closing costs may also include courier fees, notary fees, and other small administrative charges. Inspections, surveys, and pest control can be rolled into closing costs as well. If using a real estate agent, the commission will be a percentage (~6%) of the home price. In competitive markets, closing costs may increase if buyers elect to waive contingencies like financing or appraisal contingencies.

How Are Closing Costs Calculated and Who Determines Them?

Closing costs are the sum of the various fees charged by mortgage lenders, appraisers, title companies, and government entities. The total amount is determined based on:

• Loan amount – Origination and title insurance fees are based on loan size. More expensive homes have higher closing costs.
• Location – Recording and title search fees vary by county/state. Title insurance costs more in some markets. 
• Lender – Each charges different origination, application, and processing fees.
• Loan type – FHA loans require upfront mortgage insurance premiums at closing.
• Down payment – More cash down reduces closing costs but increases monthly payments.

While lenders ultimately set their own fees for application, origination, and title services, other closing costs are fixed. For instance, appraisal fees are determined by local market rates for appraisers, while recording charges are set by county governments (Source: CFPB). Mortgage brokers can give estimates of lender fees and total closing costs when applying for pre-approval. This helps buyers budget and account for these expenditures in their overall homebuying costs.

How Can Buyers Navigate Through Mortgage Closing Costs Effectively?

Since most homebuyers only interact with the mortgage process occasionally, it can be confusing to navigate through the various closing costs. However, there are some effective strategies that borrowers can use to make the most out of the situation:

Shop Around and Negotiate

One of the best ways to reduce mortgage closing costs is to compare multiple lenders and negotiate for lower lender fees. According to a report from the CFPB, borrowers can save over $800 on average by comparing mortgage offers. Some lenders may be willing to lower or waive origination and application fees to win business, especially for clients with strong credit.

Title insurance and related title service fees can sometimes be reduced as well through negotiation, particularly if buying in a competitive market. It helps to get quotes from multiple providers. Appraisal fees are harder to negotiate since they are market-driven, but some lenders will offer appraisal credits. Overall, taking the time to shop around and bargain can potentially lower closing expenses by hundreds or thousands of dollars.

Understand How the Loan Program Impacts Fees

The type of mortgage product also influences closing costs. According to data from ClosingCorp, a conventional loan has average closing costs of $6,742, while an FHA loan is $7,505. FHA loans require both upfront and annual mortgage insurance premiums, contributing to higher fees (Source: CFPB). VA loans offer streamlined underwriting and no down payment, helping reduce closing costs. 

USDA loans have average closing costs of $6,359, making them attractive to eligible buyers (Source: ClosingCorp). Being aware of the relative costs of different loan programs based on a borrower’s circumstances can minimize overall expenses.

Ask About Seller Credits

In competitive housing markets, buyers will sometimes offer to cover the seller’s typical closing costs in exchange for having their offer accepted. However, an alternative is negotiating for a seller credit, where the seller pays for part or all of the buyer’s closing costs (Source: National Association of Realtors). This reduces out-of-pocket expenditures. Seller credits may range from a few thousand dollars to covering all closing costs.

Look Into Down Payment Assistance Programs

For many first-time homebuyers, coming up with a full down payment and closing costs can be a major hurdle. However, there are over 1700 non-profit and government programs offering down payment assistance, often funded through grants, loans, or shared equity (Source: CFPB). These programs help qualified applicants cover thousands in closing costs. Connecting with a housing counselor helps identify programs available locally for specific buyer circumstances.

Utilizing available resources and financial tools strategically, along with careful negotiation, can help buyers control closing costs and navigate the mortgage process seamlessly.

How Do Closing Costs Impact the Overall Mortgage Process?

Beyond representing a one-time upfront expenditure, closing costs also influence the mortgage process and a buyer’s finances in important ways:

Closing Costs Can Be Financed Into the Loan

Homebuyers are not required to pay closing costs in cash at closing. Borrowers can choose to finance closing costs by rolling them into the mortgage loan amount. However, this increases the loan balance, which then increases monthly principal and interest payments.

For example, on a $250,000 loan at 5% over 30 years, the monthly payment would be around $1,342. But if $5,000 in closing costs are financed with the loan, the balance rises to $255,000 and the payment jumps to $1,368 per month, or $26 higher. While financing closing costs avoids large cash outlays, buyers pay more in interest over the long run (Source: Bankrate).

Regional Variations Change the Math

Location has a major influence on closing costs. For example, Bankrate data shows the average total closing costs for a $200,000 mortgage in Philadelphia are $5,788 but rise to $7,281 in Miami. Origination, title insurance, and recording fees vary based on prevailing local rates and regional economies. 

On a $500,000 jumbo loan, closing costs range from $9,077 in Chicago to $12,164 in Los Angeles (Source: Bankrate). Since higher home prices have proportionally larger closing costs, regional differences really add up. Being aware of market-specific closing cost norms helps buyers budget realistically.

Government Loans Can Offer Closing Cost Advantages

Besides influencing monthly payments, the type of mortgage product also changes total closing cost amounts. According to ClosingCorp, the average costs for conventional loans are $6,742, while VA loans are $6,469 and FHA loans are $7,505. 

VA mortgages allow veterans to roll closing costs into the loan amount, deferring costs (U.S. Department of Veterans Affairs). FHA loans permit gifted down payments from family or non-profits, a popular way to offset closing costs (Source: CFPB). Understanding the benefits and tradeoffs of various loan programs is key to minimizing total expenditures.

Closing Costs May Be Waived in Some Scenarios

While typical for most deals, closing costs are not a given. In certain situations, buyers may see closing costs reduced significantly or waived entirely:

• Lender credits – To win business, a lender offers $X credit toward closing costs.
• Seller concessions – Seller agrees to pay $X in buyer closing costs.
• Down payment assistance – Program pays some or all closing costs.
• VA loans – Allows veterans to roll closing costs into the loan. 
• Low-cost lenders – Online lenders like Quicken Loans offer low or no origination fees.

Savvy buyers explore any opportunities to lower closing fees and make tradeoffs to optimize the most important factors while minimizing expenditures.

What Are the Common Mistakes Buyers Make Regarding Closing Costs?

For first-time homebuyers, closing costs can often be confusing and full of unexpected surprises. However, being aware of some common missteps can help avoid unpleasant shocks:

• Not accounting for closing costs in the budget – Failing to adequately save and budget for closing expenditures. 
• Underestimating costs – Just relying on online closing cost calculators rather than getting a formal Loan Estimate from a lender.
• Overlooking regional variation – Not accounting for higher closing costs in certain metro areas.
• Not shopping around – Going with the first lender offer without comparing mortgage terms and fees.
• Paying cash unnecessarily – Putting extra cash toward closing costs rather than exploring seller credits.
• Financing blindly – Adding closing costs to the loan amount without considering increased interest charges and payments. 
• Waiving contingencies – Waiving key contingencies like the appraisal makes closing costs and the loan riskier.

Taking the time to educate oneself, understand all the costs, create accurate estimates, and negotiate vigilantly helps first-time buyers avoid major mistakes regarding closing costs. Being a well-informed borrower makes the mortgage process much smoother.

Conclusion

Mortgage closing costs encompass lender charges, title fees, transfer taxes and more, costing several thousand dollars on average. While specific costs depend on the loan, property, and location, buyers have several strategies to minimize expenses, like shopping around, negotiating, and leveraging different loan program benefits. While closing costs add to upfront homebuying costs, understanding these fees and planning ahead helps borrowers navigate this key step in the home financing process.