Accessing homeownership is costly, and many homebuyers must save for years before they have enough to purchase a home. Coming up with a down payment is the most common barrier to homeownership, a barrier that is exacerbated by closing costs. Closing costs are fees and expenses that homebuyers must pay to finalize a real estate transaction, and they often exceed $10,000.
As homes become more unaffordable, there has been growing interest in exploring ways to reduce transaction expenses. But some components of closing costs are opaque to homeowners, policymakers, and industry professionals, with limited comprehensive data showing how much homebuyers are paying and what fees are being charged. In May 2024, the Consumer Financial Protection Bureau launched a public inquiry to investigate why closing costs have increased and to assess whether certain fees could be lowered.
Using Fannie Mae data, we examine what closing costs consist of, the size of each component, and how these costs vary by loan amount. The next post in this series illustrates how much these costs vary by geography across the United States and discusses potential ways to reduce them (link added 1/7/2025).
Prepayments account for a large share of closing costs
Broadly, closing costs include origination, title and settlement, government, and third-party fees. We obtained detailed breakdowns of each closing cost component based on loan amount and location, as well as more detailed information about individual fees. The data are based on a sample of owner-occupied purchase loans Fannie Mae acquired over an 18-month period. We compiled closing cost data for states and counties at four loan amount ranges—below $100,000, $200,000 to less than $300,000, $400,000 to less than $500,000, and $600,000 to less than $700,000
Because Fannie Mae does not provide national numbers, we weigh the total closing costs and fees by the number of households in each state to estimate national closing cost totals and components. Although Fannie Mae’s data do not allow us to examine changes over time, this current snapshot is an essential first step toward better understanding closing costs.
Nationally, the average homebuyer taking out loans between $400,000 and $500,000 can expect to pay between $10,500 and $21,000 at closing. The largest component of these costs is prepaid expenses. These are regular payments that the borrower needs to pay monthly or annually over the course of their loan and account for about half the costs the average homeowner pays at closing. Prepayments are technically forwards on regular payments that the homeowner would pay later anyway, not closing costs. These fees include homeowners’ association (HOA) dues, escrows, private mortgage insurance, homeowners’ insurance, and property taxes.
Below, we show the 25th, 50th, and 75th percentiles for each fee category that contributes to overall closing costs. For the remaining analysis, we exclude prepaid expenses (shown below as “HOA, escrows, and prepaid”) from the total closing costs. Moving forward, we consider closing costs to be mandatory expenses related to closing the loan.
A few fees account for most of the total closing cost
Not all closing cost components are equal. Just a few fees make up most of an average closing cost payment. Lender title fees and title insurance make up the largest portion of the total costs for a mortgage between $400,000 and $500,000, followed by transfer taxes and origination fees. These three fees alone account for $4,315, or 57 percent of total average closing costs (excluding prepaid expenses).
Settlement and closing fees, tax stamps, the appraisal fee, and the optional owner’s title insurance make up another $2,407 (32 percent), meaning that the largest seven fees represent nearly 88 percent of total closing costs. The remaining smaller fees contribute minimally. For example, average credit report charges are $80, or 1 percent of closing costs. The smallest seven fees make up just 1.8 percent of total closing costs.
Closing costs tend to have a large fixed component
Our analysis shows that homebuyers who take out small loans often pay higher closing costs relative to their loan amount compared with homebuyers who take out larger loans. For example, a homebuyer purchasing a $100,000 home with a 3 percent down payment (meaning a $97,000 mortgage) pays an average of $4,300 in closing costs, or 4.4 percent of the mortgage amount. Meanwhile, a buyer purchasing a $700,000 home under the same conditions (a $679,000 mortgage) pays about $9,500, or 1.4 percent of the mortgage. (The data we are using is based on ranges of loan amounts in price buckets. To estimate ratios of closing costs to the loan amount, we use the highest loan value in each range less a 3 percent down payment).
This difference in share occurs because many fees are not sensitive to loan size. Fees like mortgage origination, appraisal, inspection, recording, and credit report charges have a large, fixed component and do not increase proportionally with loan amounts. Therefore, these fees are higher relative to the loan amount for borrowers who take out smaller loans. For example, origination fees are 1.03 percent of the loan amount for a $97,000 loan ($999) compared with 0.18 percent of total closing costs on a $679,000 loan ($1,222).
Several fees do increase with the loan amount, like title insurance–related fees, including lender’s and owner’s title insurance fees, as well as settlement and closing fees, transfer tax total, and tax stamps. But among these fees, only the transfer tax is directly proportional to the loan amount. All the rest cost more as a percentage of the mortgage for homeowners who take out smaller loans. Even after taking out fixed costs, such as document preparation and delivery fees and lender’s title insurance–related fees, the average cost of title insurance was about 0.78 percent of the total loan amount for borrowers who took out a $97,000 loan ($757) compared with 0.35 percent for those who borrowed a $679,000 loan ($2,241).
Why closing costs matter
Our research identifies which fees contribute the most to closing cost payments, with implications for regulators and consumers alike. For one, there is room for negotiation and comparison shopping. The Consumer Financial Protection Bureau has several resources and tools that more fully explain each of these fees. It also has tools to help consumers shop for title insurance and other closing services. Fannie Mae’s closing cost calculator allows people to look up typical closing costs by state, county, and loan amount.
Ultimately, the sizes of the fees that make up closing costs vary significantly and lead to a regressive pattern of costs, which makes closing costs more burdensome for homebuyers with lower incomes and less wealth, who tend to buy less expensive homes. This added burden poses yet another roadblock to first-time homebuyers seeking to buy starter homes, further constraining access to credit.
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