Closing Costs Explained: Where the 2%–5% Actually Goes

Federal law fixes the layout. Within three business days of a mortgage application, the lender must send a Loan Estimate — a standard three-page form whose page 2 itemizes the estimated closing costs in lettered sections. At least three business days before closing, a Closing Disclosure states the final versions of the same lines. This guide is organized the way page 2 is. It sits in our Mortgages and Housing hub, alongside how much house you can afford — the calculation these costs belong inside. The ToolRush mortgage calculator runs the monthly-payment side of the same loan.

The fee list: what each charge pays for

A typical-cost range is printed only where a primary source publishes one — for most individual fees, no official national range exists. Where a range appears, its source is named.

Geography sits underneath the whole table. In LodeStar's 2025 data, the District of Columbia had the highest average purchase closing costs in dollars, at $13,836, and Delaware the highest as a share of price, at 3.06% — both driven by transfer taxes, which are calculated from the sale price and dwarf the lender's charges in high-tax jurisdictions. LodeStar attributes the national average's 2.9% fall in 2025 mainly to lower home prices pulling those taxes down.

How page 2 of the Loan Estimate is organized

The sections answer three questions: who sets the price, whether the borrower can choose the provider, and whether the line is a fee at all.

• Section A — Origination Charges. The lender's own prices (points, origination, underwriting, processing) — the only section it fully controls.
• Section B — Services You Cannot Shop For. Third-party services the lender requires and selects: appraisal, credit report, flood determination.
• Section C — Services You Can Shop For. Required services, borrower's choice of provider: title, settlement, survey (lender supplies a provider list).
• Section D — Total Loan Costs (A + B + C), and Section I — Total Other Costs (E + F + G + H).
• Section E — Taxes and Other Government Fees. Recording fees and transfer taxes.
• Section F — Prepaids. Homeowners insurance, any mortgage insurance premiums, and prepaid interest.
• Section G — Initial Escrow Payment at Closing. The starting escrow deposit for taxes and insurance.
• Section H — Other. Anything left, usually the optional owner's title policy.
• Section J — Total Closing Costs. D + I, minus any lender credits — the headline total.

The sections also carry legal weight. The CFPB sorts closing costs into three tolerance categories for the final Closing Disclosure: some cannot increase at all (fees paid to the lender, broker, or an affiliate); some can increase by up to 10% in total (recording fees, and required services from a provider on the lender's written list); and some can increase by any amount (prepaid interest, insurance premiums, escrow deposits, services shopped for off-list, and services the lender does not require). The limits assume no change in circumstances — a changed loan, down payment or appraisal can reset them.

A worked example: $400,000 purchase, 20% down

One complete bill, built on the form's own structure: a $400,000 purchase, 20% down ($80,000), a $320,000 loan. Two inputs are anchored to the sources above: origination at the bottom of Freddie Mac's 0.5%–1% range, insurance at its $2,110 average. The remaining line items are illustrative inputs, stated so the arithmetic can be re-run; they are not market averages.

The total is $12,453 — 3.89% of the $320,000 loan and 3.11% of the $400,000 price, inside the 2%–5% band on either basis ($8,000–$20,000 on the price; $6,400–$16,000 on the loan). Cash to close adds the down payment: $80,000 + $12,453 = $92,453, before earnest money already paid and any seller or lender credits, which reduce that figure. Change the state and the example moves mostly through one line — transfer taxes — which is why the same loan closes near the bottom of the band in a no-transfer-tax state and near the top in a high-tax one.

Prepaids and escrow are not fees

The most useful distinction on page 2 is between money paid for the transaction and money paid early for ownership. Sections F and G are the second kind. The prepaid insurance premium buys a year of coverage owed in any case; the prepaid interest covers the stub period before the first payment; the escrow deposit is the borrower's own money, held to pay future tax and insurance bills. In the worked example, F and G together are $2,965 + $1,428 = $4,393 of the $12,453 — over a third of the total. The fee portion — Total Loan Costs ($5,835) plus government fees ($1,325) plus the optional owner's policy ($900) — is $8,060, or 2.52% of the loan.

This distinction reconciles the two headline numbers. LodeStar's $4,528 average is built from lenders' closing-cost quotes — lender, title and government charges — while the CFPB's 2%–5% range is applied to the whole page-2 total, prepaid and escrow deposits included. Different baskets, different totals.

Which fees can be shopped or negotiated

The form itself draws the line. Section C is shoppable by design: title services, the settlement agent, a survey or pest inspection can be bought from a provider of the borrower's choosing, from the written list the lender must supply. Choosing from that list also keeps the charge inside the 10% tolerance category, so the final figure cannot drift far from the estimate; choosing off the list removes that ceiling.

Section A cannot be shopped, but it can be compared — and comparison is where the CFPB directs the effort: compare Section A origination charges, Section B services and Section J lender credits across Loan Estimates, because those are the numbers that vary by lender. Negotiating works best with competing estimates in hand; lenders will often match or beat a rival offer. Sections E, F and G are not set by the lender; if one estimate shows far lower taxes or insurance, the CFPB's reading is that the estimate is thinner, not the loan cheaper. Government fees are fixed by law: no lender can discount a recording fee or transfer tax, or mark one up.

Lender credits and seller concessions

Two mechanisms can move closing costs off the borrower's side of the table. They differ in source, limits and cost.

Lender credits appear in Section J as a subtraction from Total Closing Costs. The CFPB defines them as rebates from the lender that offset closing costs — and states the exchange plainly: the credit is not free, because the lender typically either increases the loan amount to cover the costs or charges a higher interest rate in exchange. (Fannie Mae's Selling Guide expressly excludes lender credits derived from premium pricing from the contribution limits below.)

Seller concessions — formally, interested party contributions — are amounts the seller (or a builder, developer or agent with an interest in the sale) pays toward the buyer's closing costs and prepaids. The CFPB adds the economic footnote: a seller who agrees to a credit will usually require a higher price for the home to cover it, so the buyer still pays, through the loan rather than out of pocket. For conventional loans, Fannie Mae caps these contributions as a percentage of the lower of the sales price or the appraised value, by loan-to-value ratio:

Three limits ride on top of the table. Contributions cannot be used for the down payment, for reserves, or for the borrower's minimum contribution. They cannot exceed the buyer's actual closing costs; any excess, and any amount above the percentage cap, is treated as a sales concession and deducted from the price for loan purposes. Applied to the worked example: at 20% down the loan-to-value ratio is 80%, inside the 6% band, so the ceiling on a $400,000 price is $24,000 — above the example's $12,453 of costs, so the cap would not bind there; the actual-costs limit would.

The no-closing-cost loan: the same bill, a different pocket

A loan advertised with no closing costs does not delete the charges in Sections A through E; it finances them. The structure is the lender credit above, scaled up until it covers the bill: the borrower pays little or nothing upfront and accepts a higher interest rate — the CFPB's summary is that such loans carry higher monthly payments — or, in the variant the CFPB also describes, a larger loan amount that folds the costs into the balance, where they reduce equity and accrue interest. Either way, the cost is spread across every monthly payment instead of being paid once. The form supports comparing two Loan Estimates for the same loan — one with the credit and its higher rate, one without — on cash to close today and on total interest and fees over the first five years (page 3). Which structure costs less depends on how long the loan is kept.

Refinance closing costs: lower, and here is why

A refinance replaces an existing mortgage rather than transferring a property, and the missing transfer removes whole lines from the bill. LodeStar's 2025 average refinance closing cost was $2,207 — about 49% of the $4,528 purchase average ($2,207 ÷ $4,528 = 48.7%). LodeStar's explanation is structural: with no property transfer, transfer taxes typically do not apply and an owner's title policy is not required; what remains is lender fees, a title search, recording fees and endorsements. As a planning range, Freddie Mac advises refinancers to be prepared to spend 3% to 6% of the loan principal.

The exception proves the tax point. In New York, the average refinance closing cost in 2025 was $10,553 — nearly five times the national average — because New York's mortgage recording tax is assessed on the loan amount, so it applies to refinances in full. Florida is the second outlier in the same data, at $5,250, through a documentary stamp tax on the new note. Where a state's tax follows the loan instead of the deed, refinancing stops being the cheap transaction the national average describes.