When buying a home or refinancing a mortgage, many borrowers focus on the down payment, interest rate, and monthly payment. But there is another important part of the loan process that can affect your upfront budget: closing costs.
Closing costs are the fees, prepaid expenses, and escrow deposits required to finalize a mortgage. They may include lender fees, appraisal costs, title and escrow services, government recording fees, prepaid taxes, homeowners insurance, and prepaid interest.
In many cases, mortgage closing costs may range from about 2% to 5% of the loan amount, depending on the loan type, property location, lender fees, third-party charges, and whether you are buying or refinancing.
Understanding closing costs early can help you compare loan offers more clearly, avoid last-minute surprises, and decide whether seller credits, lender credits, or another loan structure may make sense for your situation.
Closing costs are the expenses paid at the end of a mortgage transaction when the loan is finalized and, in a purchase, ownership of the property transfers to the buyer.
These costs may apply to both:
Transaction Type
How Closing Costs Usually Apply
Home purchase Paid when the home purchase closes Refinance Paid when the new refinance loan replaces the existing mortgage
Closing costs are separate from your down payment. For example, a buyer may need money for both the down payment and closing costs unless some costs are covered through seller concessions, lender credits, or other eligible options.
→ Read more: Refinance Mortgage Explained: When It Makes Sense and How Homeowners Save
How Much Are Closing Costs on a Mortgage? Mortgage closing costs vary widely, but a common estimate is about 2% to 5% of the loan amount.
The final amount depends on several factors:
Factor
Why It Matters
Loan amount Some fees are percentage-based, while others are flat charges Loan program FHA, VA, USDA, Conventional, Jumbo, and Non-QM loans may have different cost structures Property location Taxes, recording fees, title costs, and escrow practices vary by state and county Purchase vs. refinance Purchase transactions often include different title, escrow, and transfer-related costs Lender fees Some lenders charge more origination, underwriting, or processing fees than others Closing date Prepaid interest and escrow deposits may change depending on when you close
Simple Example If your loan amount is $300,000, closing costs may fall somewhere in the several-thousand-dollar range. The exact number will depend on your loan program, location, lender, and third-party service providers.
The best way to review your estimated costs is through the Loan Estimate, which is provided early in the mortgage process.
What Is Included in Closing Costs? Closing costs are usually grouped into several main categories. Understanding each category makes it easier to compare loan offers and ask better questions before closing.
1. Lender Fees Lender fees are charges related to creating, processing, underwriting, or funding the mortgage.
Common lender-related fees may include:
Fee Type
What It Usually Covers
Origination fee Cost to originate or structure the loan Underwriting fee Review of credit, income, assets, property, and guidelines Processing fee Administrative work required to prepare the loan file Discount points Optional upfront cost that may lower the interest rate
Not every lender charges the same fees. This is one reason borrowers should compare Loan Estimates carefully instead of only looking at the advertised interest rate.
2. Third-Party Fees Third-party fees are paid to companies outside the lender that help complete the mortgage transaction.
Common third-party fees may include:
Third-Party Cost
Purpose
Appraisal fee Confirms the property’s value for the lender Credit report fee Covers the cost of pulling credit reports Title search Checks ownership history and potential title issues Title insurance Helps protect against certain title-related problems Escrow or settlement fee Covers the closing/settlement company’s services Attorney fee Required or customary in some states Recording fee Paid to local government to record the mortgage or deed
These costs may vary by location and provider. In some cases, borrowers may be able to shop for certain services listed on the Loan Estimate.
3. Prepaid Costs Prepaid costs are not exactly “fees.” They are advance payments for expenses you would likely pay as a homeowner anyway.
Common prepaid items may include:
Prepaid Item
What It Means
Homeowners insurance premium Often paid upfront for the first year Property taxes May be collected based on local tax schedules Prepaid interest Interest from the closing date through the end of the month
For example, if you close in the middle of the month, you may prepay interest for the remaining days of that month.
This is why two borrowers with similar loan amounts may have different closing costs depending on their closing date and local tax timing.
4. Escrow Account Funding Many mortgage loans include an escrow account. This account is used to collect and pay future property taxes and homeowners insurance.
At closing, the lender may require an initial escrow deposit. This may include:
A few months of property taxes A few months of homeowners insurance Cushion amounts allowed by applicable rules Escrow funding can make your upfront closing costs look higher, but it is often used to help ensure future tax and insurance bills are paid on time.
Who Pays Closing Costs? Closing costs are usually paid by the buyer or borrower, but they may sometimes be negotiated or offset depending on the transaction.
In a Home Purchase Buyers commonly pay loan-related closing costs. Sellers often pay real estate commissions and may agree to contribute toward the buyer’s closing costs through seller concessions, depending on the purchase contract and loan program limits.
In a Refinance The borrower usually pays the refinance closing costs. However, some refinance structures may allow borrowers to roll eligible costs into the loan amount or use lender credits, depending on guidelines and equity.
Can Closing Costs Be Reduced? In some situations, borrowers may be able to reduce out-of-pocket closing costs. The right option depends on the loan program, lender guidelines, market conditions, and long-term financial goals.
Option
How It May Help
What to Watch
Seller concessions Seller contributes toward eligible buyer closing costs Subject to negotiation and program limits Lender credits Lender provides credit toward closing costs May involve a higher interest rate Compare lenders Helps identify lower lender fees or better pricing Compare total cost, not just rate Shop certain services Some third-party services may be shoppable Availability varies by transaction Adjust closing date May reduce certain prepaid interest amounts Must coordinate with contract and lender timeline
A lower upfront cost is not always the best long-term option. Borrowers should compare both cash-to-close and monthly payment impact before choosing a loan structure.
When Do You Find Out Your Closing Costs? Borrowers receive two important documents during the mortgage process.
Loan Estimate The Loan Estimate is provided early in the process after applying for a mortgage. It shows estimated loan terms, projected payments, and itemized closing costs.
This document is useful for comparing lenders because it breaks down:
Loan costs Other costs Estimated cash to close Whether fees can change before closing Closing Disclosure The Closing Disclosure shows final loan terms and closing costs. Borrowers generally receive it at least 3 business days before closing.
Review this document carefully and compare it with the original Loan Estimate. If something changed, ask your loan advisor to explain why.
Closing Costs vs. Cash to Close Many borrowers confuse closing costs with cash to close, but they are not always the same.
Term
Meaning
Closing costs Fees, prepaids, and escrow deposits required to close the loan Down payment Buyer’s upfront equity contribution toward the purchase price Cash to close Total amount needed at closing, including down payment, closing costs, and credits
For homebuyers, cash to close may include both the down payment and closing costs, minus any credits or deposits already paid.
How to Compare Closing Costs Between Lenders When comparing mortgage offers, do not look only at the interest rate. A loan with a slightly lower rate may have higher upfront costs, while another loan may have a different fee structure or lender credit.
Here are practical questions to ask:
What lender fees are being charged? Are discount points included? Are there lender credits? Which costs are third-party fees? Which fees are prepaid taxes, insurance, or escrow deposits? What is the total estimated cash to close? How does this compare with another official Loan Estimate? The cleanest comparison is usually made by reviewing official Loan Estimates side by side.
Why Understanding Closing Costs Matters Before You Apply Closing costs can affect your homebuying budget, refinance decision, and overall loan strategy. A borrower who understands these costs early can make more confident decisions about loan type, rate options, seller credits, and cash-to-close planning.
This is also where working with a mortgage platform that compares multiple lenders can be helpful. Instead of reviewing only one lender’s pricing and fees, borrowers may be able to compare several options and see which structure better fits their situation.
Why Choose Loan Factory for Mortgage Closing Cost Transparency? Loan Factory helps borrowers compare mortgage options with a focus on transparency, lender choice, and cost clarity.
Here is how Loan Factory may help when reviewing closing costs:
Zero application or junk fees: Borrowers can review options without unnecessary application or junk fees. Compare 240+ wholesale lenders: Loan Factory helps borrowers review multiple lender options instead of relying on only one lender. Clear Loan Estimate review: Local loan advisors can help explain lender fees, third-party fees, prepaid items, and escrow deposits. AI-powered MOSO platform: MOSO helps with pricing, lender comparisons, and scenario review. Local loan advisors: Borrowers can get support from licensed mortgage professionals who explain costs line by line. Trusted guidance: Loan Factory is led by Thuan Nguyen, recognized as the #1 Loan Officer in the U.S. Ready to Compare Your Mortgage Options? Apply online: https://www.LoanFactory.com/apply https://www.LoanFactory.com/quote www.loanfactory.com/mortgage-rate-alert
Experience note: This article is based on real purchase and refinance scenarios reviewed by Loan Factory’s lending team, where borrowers often compare Loan Estimates, prepaid costs, escrow deposits, and lender credits before choosing a mortgage structure.
Disclaimer: This content is for informational purposes only and is not a commitment to lend. Closing costs, loan terms, pricing, credits, and approval depend on credit, income, assets, property type, underwriting, investor guidelines, market conditions, and applicable loan program requirements.
FAQ: Closing Costs on a Mortgage 
