This week we are talking about closing costs on purchases, what they are, what average numbers look like, and how to read them clearly on a real loan estimate.
Know Your Closing Costs Before You Buy
Don't let hidden fees surprise you. We'll break down your estimate line by line so you know exactly what is loan cost versus cash-to-close prepaids.
Get a Free Closing Cost EstimateClosing Costs are about the work that goes into closing the loan
A lot of people assume closing costs are just a percentage of the sales price, but that's mostly a rough back-of-napkin shortcut. In practice, closing costs are the costs to do the loan and complete the work needed to close.
Do closing costs vary a lot?
Not nearly as much as people expect. There is not much extra work to close a $500,000 loan versus a $200,000 loan, so the difference in closing costs might only be around $800 even with a much larger loan amount.
What's an average closing cost?
A quick rule of thumb is about $3,500 for a purchase. Most purchase loans typically land around $3,000 to $3,800. As a comparison point, refinances are often lower, around the mid-$2,000 range.
What makes up the numbers that go into the closing costs?
In the example scenario, the sales price is $370,000 with 20% down, and total closing costs are $3,563. The larger number shown on many estimates can be higher because it includes prepaids for taxes and insurance.
That distinction matters: closing costs are not the same as cash-to-close. Prepaid taxes and insurance are cash considerations, not lender processing fees.
Let's break down the $3,563 in closing costs
The breakdown includes an underwriting fee of about $999, appraisal around $535, credit report around $48, flood cert around $11, and tax-related services around $25 and $64. These are common ranges borrowers see.
Title charges such as CPL, doc prep, endorsements, lender's policy, and escrow or settlement fees often make up a large portion, commonly around $1,800 to $1,900 in examples like this.
Together, these line items represent the work performed by lenders and third parties to verify, document, and close the transaction properly.
What's the deal with prepaids and other fees?
Prepaids can include recording fees, homeowners insurance, mortgage insurance, and property taxes funded into escrow. These can add meaningful dollars to cash-to-close, but they are not lender closing costs.
Think of escrow like prefunding future bills through your payment so taxes and insurance are paid when due. It is your money set aside for your obligations, not a separate lender markup.
Wrapping things up
The most important takeaway is learning to separate true closing costs from prepaid items. Once you understand that distinction, comparing estimates becomes much easier and much more accurate.
Transcript of the Mortgage Brothers Podcast
What Are Closing Costs on a Home Purchase?
Introduction
[00:02]
Welcome to the Mortgage Brothers Podcast! This week, we're talking about closing costs on home purchases—what they are, how much they typically cost, and how to understand them using a Loan Estimate.
Are Closing Costs a Percentage of the Home Price?
[01:44]
Many people believe closing costs are a percentage of the home price, but that's not really accurate. Closing costs cover the work required to process the loan, and the cost doesn't scale exactly with the loan amount.
- For a $200,000 home, closing costs are often between $3,000 and $3,800.
- For a $500,000 home, they might not be much higher.
A Simple Rule of Thumb for Closing Costs
[02:54]
If you're estimating closing costs on a home purchase, a good rule of thumb is $3,500.
For refinances, closing costs tend to be lower, around $2,500.
Breaking Down Closing Costs Using a Loan Estimate
[03:46]
To help explain closing costs, let's look at a real example:
- Home price: $370,000
- Down payment: 20%–30%
- Total closing costs: $3,563 (excluding prepaids)
Important Note: Many Loan Estimates will show a higher Estimated Closing Costs amount because it includes prepaids (taxes, insurance, etc.). Actual loan fees are separate.
Main Categories of Closing Costs
[05:35]
On page 2 of your Loan Estimate, the left side lists all closing costs. These include:
- Underwriting Fees (~$1,000)
- Appraisal Fee ($500–$550)
- Credit Report Fee ($40–$60)
- Flood Certification & Tax Service Fees ($15 for flood, ~$80 for tax verification)
- Title Company Fees (~$1,800–$1,900)
Underwriting Fees & Loan Origination Fees
[06:04]
Most loans do not have points, but underwriting fees are standard (~$1,000).
Appraisal Fee
[06:37]
Appraisals cost $500–$550 (slightly higher for VA loans, around $600). Some borrowers qualify for an appraisal waiver, meaning they may not need an appraisal at all.
Credit Report Fee
[07:42]
A credit report is not free—lenders pay to pull reports from Equifax, Experian, and TransUnion. This typically costs $40–$60.
Flood Certification & Tax Service Fees
[08:46]
- Flood Certification Fee (~$15) ensures the property doesn't require flood insurance.
- Tax Service Fee (~$80) verifies that property taxes are paid on time.
Title Company Fees
[09:46]
Title fees are set by third-party title companies (not the lender). These include:
- Closing Protection Letter (CPL)
- Document Preparation Fees
- Lender's Title Policy
- Settlement/Escrow Fee
Key Title Fees:
- Settlement/Escrow Fee (~$500–$600) covers the labor costs for handling the transaction.
- Lender's Title Policy ensures the property's ownership history is clear and prevents future claims against the property.
What About Prepaids & Impound Accounts?
[14:09]
Some costs listed on the Loan Estimate are not actually closing costs—these are prepaid expenses like:
- Homeowners insurance (typically one year upfront)
- Property taxes (several months of escrow payments)
These prepaids are not fees but funds set aside for future payments.
Final Thoughts: Understanding Your Closing Costs
[16:17]
The key takeaway is to distinguish between actual loan closing costs ($3,500 range) and prepaid expenses.
If a lender tells you closing costs are only $1,000, they're likely only quoting their fee, not the total amount.
Quick Summary:
- Purchase Closing Costs: ~$3,500
- Refinance Closing Costs: ~$2,500
- Prepaids & Taxes: Additional, but not actual fees
Need More Help?
If you have questions about closing costs or need a mortgage quote, reach out to us!
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Disclaimer: This content is for informational purposes only. Please consult legal or financial professionals before making any decisions.
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Mortgage Brothers LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Mortgage Brothers NMLS 1007154, NMLS #210917 and 1618695. Equal Housing Opportunity.