When you buy a home, closing costs can be significant, but you may not realize it until a few days before closing. On a $400,000 loan, costs can total about $8,000 to $20,000 – and that’s on top of your down payment.
On the positive side, the full closing cost bill is not written in stone. You may be able to negotiate some line items or use seller or lender credits to reduce your upfront costs. The key to avoiding the sticker shock is to know what you are dealing with before you sit down at the closing table.
How closing costs actually work
“Closing costs” is the catch-all term for every fee and expense required to finalize your mortgage. They show up, along with your down payment, in your total cash-to-close. While your down payment goes straight into your home equity from day one, closing costs go to the lender, the title company, the appraiser, your local government, and a handful of third-party service providers.
Federal law generally requires your lender to provide a Loan Estimate within three business days of receiving your loan application. Then, at least three business days before your closing date, you’ll receive a Closing Disclosure. If fees change meaningfully from your Loan Estimate, your lender should be able to explain why.
How much are mortgage closing costs?
Closing costs typically run 2% to 5% of your loan amount, not the home’s purchase price. That means on a $400,000 loan, expect to pay around $8,000 to $20,000. Factors that can keep your costs on the lower end of that range include buying in a state with no transfer taxes, working with a lender that offers competitive fees, and choosing a closing date near the end of the month.
Illustrative Example: Buying a $350,000 home
With a $350,000 purchase and a 10% down payment, your loan amount would be $315,000. At 2%, your closing costs would total $6,300. At 5%, you would be looking at $15,750.
A fee-by-fee breakdown of closing costs
Closing costs include numerous fees from different parties. Here are some of the most common ones.
In general, lender fees are the most negotiable, title-related costs may be shoppable, and government fees like recording charges and transfer taxes are usually not negotiable.
How closing costs differ by loan type
Your loan type can affect your closing costs. Government-backed loan programs such as FHA, VA, and USDA also have program-specific upfront and ongoing fees.
Can you roll closing costs into your mortgage?
Rolling closing costs into a mortgage usually refers to adding the closing costs to the loan balance. This approach may be available if your lender allows it and you meet the loan’s requirements, although not every closing cost can be financed. A key exception is the VA funding fee, which can be financed on eligible VA loans.
The main thing to realize is that shifting closing costs into a 30-year mortgage means you’ll be paying interest on that amount for the life of the loan.
How no-closing-cost mortgages work and when they are worth it
If you’ve heard the term “no-closing-cost mortgage,” understand that it does not eliminate closing costs. It simply means the lender provides a lender credit toward some or all of your closing costs in exchange for a slightly higher interest rate. Here are some things to know about this option:
N/A
Pros
- Reduces closing costs paid out of pocket
- Preserves cash for repairs or reserves
- Can make a marginal refinance worthwhile
- May make sense if you plan to sell or refi within a few years
Cons
- Higher interest rate from day one
- Costs more in total interest long-term
- Rate premium complicates payoff math
- Not every lender offers this option
How to calculate your break-even point
The break-even point refers to the moment when the additional cost of the higher rate outweighs your upfront savings.
For example, say you have $6,000 in closing costs and the lender offers to cover them in exchange for increasing the rate from 6% to 6.25% on a 30-year, $300,000 loan. That adds roughly $48.50 per month. Divide $6,000 by $48.50 and your break-even moment is about 124 months, or roughly 10 years and four months.
If you expect to keep the loan for less than the break-even period, a lender-credit option may cost less overall. But once you move past that threshold, the loan becomes more and more costly to you because of that higher interest rate you opted for.
How to reduce your mortgage closing costs
You can reduce closing costs in a few different ways.
- Negotiate origination fees. If you have competing Loan Estimates in hand, use them as leverage. Some lenders stack a processing fee, underwriting fee, and document prep fee on top of the origination fee. It is worth asking your lender if they’re willing to consolidate or waive such add-ons.
- Request seller concessions. In a buyer’s market, sellers may be more willing to offer them. In a competitive market, they can be a useful negotiating tool to build into your offer.
- Consider using lender credits. If you are cash-constrained, do some break-even math to understand how long the trade could work in your favor.
- Close near the end of the month. Closing on the 27th instead of the 5th cuts your prepaid interest bill from nearly a full month down to just a few days.
- Shop title insurance independently if your lender allows it. Call at least three companies. Prices may vary, creating an opportunity to save money.
- Check for state or local assistance programs. Many state housing finance agencies offer closing cost assistance to first-time buyers.
- Ask your lender to walk through Section A of the Loan Estimate. A line-by-line review is one of the most useful conversations you can have before closing since it’s where the most negotiable fees live.
The takeaway
Mortgage closing costs are predictable, but not necessarily fixed. Buyers may have room to negotiate certain fees, shop around, or ask the seller to cover part of the bill.
The best move? Don’t wait until you reach the closing table to discover your options. Get Loan Estimates from at least three lenders early in the process so you can compare fees line by line, and decide how much seller contribution you want to build into your offer. By knowing which costs you can negotiate or shop for and whether the seller can contribute, you may be able to save significantly.
FAQs
Why do closing costs vary so much by state?
Closing costs can vary drastically from state to state, in part because of transfer taxes. Transfer taxes vary widely by state and locality, and in some markets, they can add materially to your cash to close. Whether or not your state requires attorney involvement in the closing can also add legal fees that buyers in some states don’t have.
How much are closing costs on a $400,000 house?
Closing costs are typically 2% to 5% of the loan amount. With a 5% down payment of $20,000 and a $380,000 mortgage, your closing costs could range from $7,600 to $19,000.
Can I get a grant for closing costs?
There may be opportunities to get a grant that can help pay for closing costs depending on the buyer’s situation, location, and lender. When buying a home, check whether your state or local government, nonprofit organizations, or lenders offer closing cost grants.
Are closing costs based on the sale price of the home?
Closing costs are most commonly estimated as a percentage of the mortgage amount, according to Fannie Mae, though certain fees may be based on the total home sale price. Unless your down payment is very significant, this distinction shouldn’t alter the math too much. The best strategy is to review your loan estimate carefully to get a sense of what your cost obligations will be on closing day.
Are closing costs negotiable?
Closing costs include all sorts of different fees. While some of those fees are set in stone, you may be able to negotiate others or shop for better rates. Some negotiable closing costs include origination fees, various title fees and insurance, and settlement fees.