What the heck is APR?
APR is the government's attempt to confuse you. Just kidding. Sorta.
Mortgage closing costs vary based on the lender or broker, mortgage program, down payment, and interest rate. To compare mortgage closing costs for different estimates, compare the interest rate, discount points, lender fees and lender credits together. Then check third-party charges and make sure both estimates use realistic taxes, insurance and closing dates.
The smallest number at the bottom is not automatically the best deal.
The four buckets of mortgage closing costs
| Cost bucket | What it covers | What to compare |
|---|---|---|
| 1. Discount points | Money paid upfront for a lower interest rate. | The rate and the price of that rate. |
| 2. Lender or broker fees | Charges for arranging and processing your mortgage. | The total fees, minus lender credits, alongside the rate. |
| 3. Third-party and government charges | Appraisal, credit report, title, settlement and recording costs; applicable program charges. | Actual services, providers and costs—not just estimates. |
| 4. Prepaids and escrow deposits | Insurance, prepaid interest and money set aside for future tax and insurance bills. | The assumptions behind the numbers. |
These are comparison buckets, not the exact section titles on a Loan Estimate. And your down payment is separate from closing costs, although both affect the cash you need.
1. Discount points: What does that rate cost?
Discount points refer to the price paid for the interest rate you've chosen. Banks and mortgage companies have a range of interest rates available every day at different prices. The lower the interest rate, the higher the cost. This is referred to as "paying points."
A low rate can come with a large upfront bill. One discount point equals 1% of the loan amount. On a $400,000 loan, one point is $4,000; two points cost $8,000. A point does not mean your interest rate falls by one percentage point. The rate reduction varies.
Ask each lender to show you a zero-point option and the cost of a lower rate. Compare offers from the same day, using the same loan program, term, loan amount, down payment, property use and lock period. A quote from last week is not a fair comparison with today's pricing.
Shopping online? Read beyond the advertised rate.
A low advertised interest rate can hide a hefty price tag. In this real advertisement, a 5.75% interest rate looks appealing. But what does it cost to get that rate?
Now read the fine print. That rate costs 3.0% in discount points. On the advertised $726,200 loan, that is $21,786 for the interest rate alone, before other closing costs.
When comparing online mortgage rates, look for the points, lender fees, loan amount, down payment, credit assumptions and lock period. Ask what the same loan would cost with fewer discount points. The headline rate is only part of the price.
Will you keep the loan long enough to recover the cost?
For a simple starting point, divide the extra upfront cost by the monthly payment savings. If a lower rate costs an extra $4,000 and saves $80 a month, the simple break-even period is 50 months. If you sell or refinance sooner, you may not recover that extra cost.
2. Lender or broker fees: Add them up
Lender fees are charges that are paid directly to your mortgage lender or broker. They may be called an origination, processing, underwriting, or administration fee. Different labels can make similar charges look very different. Add the lender or broker charges together before deciding who costs less.
3. Third-party charges: Check the service behind the price
These can include the appraisal, credit report, title insurance and settlement services. Government recording charges also belong in your overall comparison. Costs depend on the property, provider, location and loan. They are not all fixed, and they are not necessarily identical across lenders.
A rural Washington appraisal example
Suppose one estimate allows $600 for an appraisal and another allows $925. That does not automatically mean the second lender is overcharging. A rural property may require an appraiser to drive an hour each way, research unusual acreage or locate comparable sales across a much larger area.
Ask: “Is this an actual quote for this property or a placeholder?” Also ask how the lender obtains an appraiser with experience in that market. The cheapest appraisal is not much of a bargain if the assignment is a poor fit and the appraiser doesn't understand the market.
4. Prepaids and escrow deposits: Your money, set aside for your bills
Prepaids can include the first insurance premium and interest for the period between closing and the end of the month. Initial escrow deposits fund an account used to pay future property taxes and insurance. They are not the same thing as a fee paid to the lender for making the loan.
A lender does not make your insurance cheaper by typing a smaller number into the estimate. And a low property-tax estimate does not lower the actual tax bill. Verify the insurance quote and property-tax assumptions, including whether new construction has been fully assessed.
These amounts can legitimately differ because of the closing date, interest rate, escrow setup or bill due dates. Ask the loan officers to explain differences and use matching assumptions where appropriate. There is no universal number of months of taxes and insurance that fits every closing.
Compare the whole mortgage, not just cash to close
Cash to close includes more than fees. It reflects the down payment, closing costs, deposits already paid, applicable credits and other adjustments. A lower figure may mean a smaller down payment or more costs financed into the loan. It may also mean an expense has been left out.
Before choosing, ask both lenders:
- Are these quotes for the same loan and the same lock period? Is the rate actually locked?
- How much am I paying in points and lender fees, and what credits am I receiving?
- Which third-party amounts are confirmed, and which are estimates?
- Are property taxes, homeowners insurance and mortgage insurance included accurately?
- What are my total monthly housing costs and cash needed at closing?
- How does each option work over the time I expect to keep this loan?
A loan should fit the rest of your life, too. If retirement is approaching, paying more upfront for a lower payment may appeal to you. Or keeping cash available may matter more. The right conversation includes your cash reserves, expected income and retirement strategy. Coordinate those decisions with your financial and tax advisers when appropriate.
Frequently asked questions about closing costs
Does the lowest interest rate mean the cheapest mortgage?
No. A lower rate may require substantial discount points. Compare the upfront cost, monthly savings and expected time in the loan before deciding.
Are closing costs the same as the down payment?
No. The down payment is your contribution toward the purchase price. Closing costs cover the transaction and loan expenses. Both affect the money you need, along with deposits and credits.
Can I negotiate closing costs?
You can ask lenders to improve their pricing and shop for eligible services. Some charges are set by a government agency or loan program. Ask which items can change and whether a lower upfront cost would require a higher rate.
Should I ignore third-party fees when comparing lenders?
No. Some differences are only estimates, but others reflect different providers or required services. Ask what is included and get property-specific quotes where possible.
Is a “no closing cost” loan free?
No. Find out who pays the costs and how. A lender credit may come with a higher rate. If costs are added to your loan balance, you borrow more and may pay interest on them.
Is APR the best way to compare mortgage offers?
APR combines the interest rate with certain loan costs into an annual measure. It is useful, but it does not include every expense or tell you which loan best fits your plans. Compare similar loans and review the actual fees and expected holding period.
How much are closing costs in Washington State?
There is no single dollar amount that fits every buyer. Points, loan type, property, service providers, insurance, taxes and closing date all affect the total. Ask for an itemized estimate for your situation instead of relying on a statewide average.
Want help making sense of two estimates?
I’m Emily Caryl Ingram with New American Funding. I’ve worked in mortgage lending since 2001 and am licensed throughout Washington State. I can help you identify which differences are real pricing, which are assumptions and which reflect a different loan strategy.
Contact me or call/text 360-301-7575. Bring your questions. There is no prize for pretending mortgage paperwork makes sense.
Helpful sources
- CFPB: Loan Estimate explainer
- CFPB: Compare and negotiate loan offers
- CFPB: Discount points and lender credits
Examples are for education only and are not offers to lend or quotes for rates or fees. Actual costs and available options depend on the borrower, property and loan program. This comparison guide discusses standard Loan Estimates used for most closed-end residential mortgages; other products may use different disclosures.
