Mortgage Closing Costs Explained: What You Pay, Who Pays It, and How to Pay Less

You’ve found the house. You’ve locked the rate. Then your lender hands you a closing disclosure, and there’s an extra $8,000 in fees you weren’t expecting.

Closing costs catch more first-time buyers off guard than almost anything else in the mortgage process. They’re not hidden, exactly. But they’re rarely explained well until the number is staring at you three days before closing.

Here’s what you’re actually paying for, who pays what, and how to keep the total as low as possible.

What are closing costs?

Closing costs are the fees charged to finalize your mortgage. They cover everything from the lender’s work underwriting your loan to the government recording your deed to the third parties who appraised the home and insured the title.

On a purchase mortgage, closing costs typically run 2% to 5% of the loan amount. The national average for a single-family home purchase is $4,661 in lender and third-party fees, though total costs including prepaid taxes and insurance push that higher.

For a $350,000 loan, expect somewhere between $7,000 and $17,500 in total closing costs. That’s a wide range because the specific fees depend on your loan type, your state, and your lender.

Every closing cost, explained

Here’s the full breakdown of what shows up on your closing disclosure and what each fee actually pays for.

Lender fees

Fee	Typical range	What it pays for
Origination fee	0.5%–1% of loan	The lender’s charge for processing and funding your loan
Underwriting fee	$300–$750	Evaluating your income, credit, and risk profile
Processing fee	$300–$900	Administrative work to move your file through the pipeline
Credit report fee	~$35	Pulling your tri-merge credit report from all three bureaus
Rate lock fee	$0–$500	Holding your rate for a set period (often included in origination)

The origination fee is the biggest lender charge. On a $400,000 loan at 1%, that’s $4,000. Some lenders advertise “no origination fee” but compensate with a higher rate. Always compare the total cost, not individual line items.

Third-party fees

Fee	Typical range	What it pays for
Appraisal	$300–$1,000	Independent assessment of the property’s market value
Title search	$200–$400	Verifying the property has no liens, disputes, or claims
Lender’s title insurance	$200–$1,000+	Protects the lender if a title defect surfaces later
Owner’s title insurance	$500–$2,500	Protects you (the buyer) against title claims
Home inspection	$300–$1,000	Evaluating the property’s physical condition
Survey	$300–$800	Confirming the property’s boundaries

Title insurance is often the single largest third-party cost. Lender’s title insurance is required. Owner’s title insurance is optional but strongly recommended.

Government fees

Fee	Typical range	What it pays for
Recording fees	$50–$250	County charge to record the deed and mortgage
Transfer taxes	Varies by state	State or local tax on transferring property ownership

Transfer taxes vary enormously by location. Some states charge nothing. Washington, D.C. charges enough to make it the most expensive closing cost state in the country at $17,545 on average.

Prepaids and escrow

Fee	Typical amount	What it pays for
Prepaid interest	Per diem rate × days until first payment	Interest from your closing date to the end of the month
Homeowners insurance	First year’s premium	Your initial insurance policy (often 12 months upfront)
Property tax escrow	2–6 months of taxes	Reserve held by your lender to pay future property taxes
Insurance escrow	2–3 months of premiums	Reserve held by your lender to pay future insurance

Prepaids aren’t fees in the traditional sense. They’re payments you’d owe regardless. But they do show up on your closing disclosure and require cash at closing.

Who pays what

Buyers and sellers split closing costs, but the split isn’t equal.

Buyers typically pay 2%–5% of the loan amount, covering lender fees, appraisal, title insurance, prepaids, and escrow. These are the costs directly tied to obtaining the mortgage.

Sellers typically pay 8%–10% of the sale price, with the bulk going to real estate agent commissions (roughly 5%–6% total). Sellers also commonly pay transfer taxes and owner’s title insurance, depending on state custom.

Seller concessions

You can negotiate for the seller to cover some of your closing costs. This is especially viable in buyer’s markets or when a property has been sitting. Loan programs cap how much the seller can contribute:

Loan type	Maximum seller concession
Conventional	Up to 9% of purchase price
FHA	Up to 6%
VA	Up to 4%
USDA	Up to 6%

A seller concession doesn’t eliminate the costs. It shifts who writes the check. The home’s appraised value still needs to support the purchase price.

Closing costs: purchase vs. refinance

Refinancing is cheaper to close because you skip several purchase-specific fees.

	Purchase	Refinance
National average	$4,661	$2,403
Typical range	2%–5% of loan	1.5%–3% of loan
Unique costs	Home inspection, first-year insurance, transfer taxes	None of these apply

With a refinance, you’re already in the home. No inspection, no new insurance policy, and most states don’t charge transfer taxes on a refi. That cuts the total significantly.

The fees you still pay on a refinance: appraisal, origination, title search, title insurance, recording fees, and credit report.

How closing costs have changed recently

Closing costs have been rising. The CFPB found that median total loan costs increased over 36% from 2021 to 2023. Credit report fees alone spiked 25% to 400% in some cases, driven by concentration in the credit reporting industry.

The share of borrowers paying discount points has also jumped. In 2022, 50.2% of purchase borrowers paid points, up from 32.1% in 2021. The median amount paid: $2,370.

The CFPB launched a formal inquiry into mortgage closing cost “junk fees” in 2024, examining why costs are rising so sharply and whether certain fees provide genuine value to borrowers. This could lead to new rules that increase transparency and reduce unnecessary charges.

Closing costs by state: where you pay the most and least

Your state has a massive impact on total closing costs, primarily driven by transfer taxes and local fees.

Most expensive states:

• Washington, D.C.: $17,545
• New York: $13,000+
• Delaware: $12,000+

Least expensive states:

• Missouri: $1,740
• Iowa: $1,640
• South Dakota: $1,551

Texas and Colorado, where Chestnut operates, fall in the middle of the pack. But even within a state, costs vary by county and lender. Shopping around is not optional.

Seven ways to reduce your closing costs

1. Compare at least three lenders

This is the single highest-impact move. Lender fees (origination, underwriting, processing) vary significantly even for the same borrower profile. AI-powered platforms like Chestnut compare rates and fees across 100+ lenders in under two minutes, eliminating the need to fill out multiple applications.

2. Negotiate lender fees

Origination fees, underwriting fees, and processing fees are all negotiable. Ask for a breakdown and question any fee that seems vague or duplicative. “Administrative fee” and “document preparation fee” are often soft charges that can be reduced or waived.

3. Shop for third-party services

Your Loan Estimate identifies which services you can shop for, including title insurance, title search, and home inspection. You’re not required to use the lender’s preferred vendors. Get competing quotes.

4. Ask for seller concessions

In a balanced or buyer-friendly market, asking the seller to cover 2%–3% of closing costs is standard negotiation. Frame it as part of your offer: slightly higher purchase price in exchange for seller-paid closing costs.

5. Close at the end of the month

Prepaid interest covers the days between your closing date and the end of the month. Close on the 28th and you pay 2–3 days of interest. Close on the 5th and you pay 25–26 days. On a $400,000 loan at 6.5%, each day costs roughly $71.

6. Look into first-time buyer programs

Many state and local programs offer closing cost assistance, down payment grants, or reduced fees for first-time buyers. These programs are often underutilized because buyers don’t know they exist. Your lender or real estate agent should be able to point you to options in your area.

7. Consider a no-closing-cost option

Some lenders offer to cover your closing costs in exchange for a higher interest rate. This makes sense if you’re planning to sell or refinance within a few years. Over a 30-year loan, the higher rate costs far more than paying closing costs upfront. But for short-term ownership, it can save real money.

The CFPB notes that no-closing-cost loans aren’t truly free: you’re either paying a higher rate or rolling costs into a larger loan balance. Calculate the break-even point before deciding.

Understanding your Loan Estimate and Closing Disclosure

Two documents give you full visibility into your closing costs:

Loan Estimate: Your lender must provide this within three business days of your application. It breaks down estimated closing costs into three categories: loan costs, other costs, and prepaids. Use this to compare offers across lenders.

Closing Disclosure: Delivered at least three business days before closing. This is the final version. Compare it line by line against your Loan Estimate. Lender charges cannot increase. Third-party fees can increase by up to 10%. If anything looks wrong, ask before you sign.

Frequently asked questions about closing costs

How much should I budget for closing costs?

Budget 2%–5% of your loan amount for a purchase and 1.5%–3% for a refinance. On a $350,000 loan, that’s $7,000 to $17,500 for a purchase. Your lender will provide an exact estimate within three business days of your application via the Loan Estimate form.

Can I roll closing costs into my mortgage?

For refinances, yes. Most lenders let you add closing costs to your loan balance. For purchases, you generally can’t increase the loan amount above the appraised value. You can, however, negotiate seller concessions or choose a no-closing-cost option with a higher rate.

Are closing costs tax deductible?

Some closing costs are deductible in the year you close. Property taxes paid at closing and mortgage interest (including prepaid interest and discount points) are typically deductible if you itemize. Origination fees, title insurance, and most other closing costs are not. Consult a tax professional for your specific situation.

Why did my closing costs change between the Loan Estimate and Closing Disclosure?

Certain fees can legally increase. Third-party services you didn’t shop for can go up by up to 10%. Services you chose from the lender’s list, recording fees, and taxes can change without limit. However, lender-controlled charges (origination, underwriting) cannot increase from the Loan Estimate. If they did, push back.

How do Chestnut’s closing costs compare?

Chestnut’s AI-powered process automates much of the manual work that drives up origination costs at traditional lenders. This operational efficiency translates to competitive lender fees. You can compare your options in under two minutes without a commitment.

Sources

1. https://www.bankrate.com/mortgages/what-are-closing-costs/
2. https://www.bankrate.com/real-estate/average-closing-costs-by-state/
3. https://www.bankrate.com/mortgages/how-much-it-costs-to-refinance/
4. https://www.bankrate.com/real-estate/who-pays-closing-costs/
5. https://www.consumerfinance.gov/about-us/blog/junk-fees-are-driving-up-housing-costs-the-cfpb-wants-to-hear-from-you/
6. https://www.consumerfinance.gov/about-us/newsroom/cfpb-launches-inquiry-into-junk-fees-in-mortgage-closing-costs/
7. https://www.consumerfinance.gov/ask-cfpb/is-there-such-a-thing-as-a-no-cost-or-no-closing-loan-or-refinancing-en-141/
8. https://www.nationwide.com/lc/resources/home/articles/what-are-closing-costs
9. https://www.urban.org/urban-wire/what-components-make-closing-costs
10. https://myhome.freddiemac.com/refinancing/costs-of-refinancing