7 Ways To Reduce Your Closing Costs
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The bill for closing costs is the final hurdle between home buyers and their new homes, and it can represent a surprising chunk of money. Closing fees run between 2% and 6% of the mortgage; that's around $7,000 to $21,000 on a $350,000 loan. (Use this closing costs calculator to estimate fees on your purchase.)
The impulse to just pay up and move in is understandable, but you wouldn’t buy a car or a TV without researching prices on other, similar products. The same goes here. Cutting these closing costs even a little could help pay for a new couch or outfit the guest room.
1. Shop for the lowest lender fees
Most lenders charge an origination fee for processing the loan. A lender might charge a single flat fee or break it down into different categories, such as application, processing, underwriting and verification fees. To find out how much those fees are, consult the Loan Estimate from your lender.
A Loan Estimate is a three-page form a lender must provide within three business days after applying for a mortgage. The Loan Estimate spells out the terms and estimated loan cost, including the closing costs.
You'll find all the closing costs itemized on page 2. The lender fees are under "A. Origination Charges." Don't get distracted by the fee names. Look at the total amount.
It doesn't hurt to ask the lender to reduce the origination charges, but the best way to save money on fees is to apply with multiple lenders and choose the one with the lowest-cost offer.
2. Shop for services
Besides lender fees, closing costs include expenses for other companies' services, some of which you can shop for to save money. These are listed in Section C, page 2 of the Loan Estimate: “Services You Can Shop For” and include:
Pest inspection fee.
Survey fee.
Title search, which investigates a property’s history for restrictions or liens.
Title insurance binder, which covers the buyer and seller during the transfer process.
Lender’s title policy, which protects a lender in case of a problem with the title.
Settlement agent fee, also called an escrow agent or closing agent, who represents the buyer and oversees the closing and legal transfer of title.
Of these fees, you stand to save most on the priciest services: title insurance and settlement services, which are often combined. If you're going to shop for title and settlement service providers, move quickly. These firms require time to research and prepare documents.
The companies your lender or real estate agent recommends might offer good deals. But get quotes from a few other companies to compare costs.
Comparison shopping among pest inspectors or surveyors might not uncover great price differences, but it doesn’t hurt to check.
3. Shop around for home insurance
You'll need home insurance to close the loan, and typically you'll prepay for coverage at closing.
Home insurance rates for the same coverage vary. A NerdWallet analysis showed that some homeowners could save $1,000 or more annually by shopping around for the cheapest rate.
Compare home insurance quotes to find the best price.
4. Ask the seller to contribute
Depending on the market and the home, a seller might contribute money toward your closing costs. This is more likely to happen with hard-to-sell properties or in markets with more homes for sale than buyers.
In hot real estate markets where buyers compete aggressively, there may be little chance of getting a seller to help.
Your real estate agent can guide you on whether to ask a seller to contribute and help you craft a negotiating strategy.
5. Get closing-cost assistance
Some local and state agencies offer first-time home buyer grants and forgivable loans to help pay closing costs. Contact your state housing finance agency to learn about eligibility requirements and to get a list of participating lenders.
In addition, some banks and credit unions offer incentives and rebates to help with closing costs. When you're shopping for lenders, ask what special programs they offer.
6. Consider a no-closing cost mortgage
A no-closing cost mortgage can be helpful if you’re short on cash. But the closing costs you don’t pay upfront will be folded into the loan or covered through a higher interest rate, which will increase your monthly mortgage payments.
7. Sign loan papers near the end of the month
Among your closing costs is prepaid interest — the interest that accumulates between the date of the closing and the first of the month. Scheduling the closing toward the end of the month reduces the prepaid interest you'll owe at closing.
But there's a trade-off. Usually, your first mortgage payment is due on the first of the month, 30 days from the closing. So if you close on May 20, your first mortgage payment would be due July 1. If you close late in the month, you owe less in prepaid interest at closing but have fewer days before your first mortgage payment is due.
It's a cash-flow issue. Do you want to reduce your outlay at closing, but face a first mortgage payment sooner? Or would you rather pay more at the closing table and have more breathing room until your mortgage payment is due?
Ask your loan officer for guidance.
Some closing costs are fixed
You can't do anything to reduce some closing costs, such as taxes and government fees, so control what you can. Compare offers from multiple lenders, shop for services like title insurance and home insurance, and look for closing cost assistance through first-time home buyer programs. Meanwhile, understand the tradeoffs involved if you consider a no-closing-cost mortgage or want to strategically time the closing date.
