How to Reduce Closing Costs

Getting a mortgage is the only way most people will ever afford to buy property, especially as real estate trends toward higher and higher costs of home ownership. And the costs of getting a mortgage can be a barrier to homeownership for many buyers, especially first-time buyers. Average closing costs on a home tend to be between two and seven percent of the home’s purchase price, or $5,000 to $17,500 on a $250,000 home.

But, unlike many of the costs of home ownership, you have some control over closing costs. You can shop around to reduce your closing costs, and what you can’t avoid altogether, you can at least avoid paying up front. With a little due diligence, you can reduce your closing costs by hundreds, if not thousands, of dollars.

Follow these tips for help cutting the closing costs on your new home.

Shop Around

Knowing what to look for when buying a house doesn’t just mean knowing what the realtor really means when he or she starts talking about “good bones.” It also means knowing how to save money on closing costs. Before you choose a lender, you should talk to two to five banks and get a legally binding, three-page Loan Estimate form from each one. Federal law requires lenders to give you this form within three days of applying for a mortgage, but some will provide it before you apply. You can use it to shop around for a cheaper loan by comparing lenders’ closing costs.

When you get the form, look for Section C: Services You Can Shop For. These services include fees for pest inspections, title insurance binder, survey work, settlement agents, the title search and the lender’s title insurance policy. By comparison shopping for these services, you can save a lot of money. The biggest savings tend to be had when comparison shopping for title insurance and settlement services, which are generally the most expensive. However, if you’re going to shop around for these services, you should do so right away because these professionals need plenty of time to prepare your documents for closing day. 

You should also scrutinize the rest of the Loan Estimate and push back on any fees you don’t understand or which have vague names. Some standard fees you can expect to pay include loan origination fees, underwriting fees, a fee for running your credit report, an appraisal fee, taxes, document recording fees, attorneys’ fees, home warranty costs, discount points and private mortgage insurance. If you’re not sure what a fee is, ask about it. If you can’t get vague fees removed, move on to a lender who doesn’t charge so many.

Fold Closing Costs into the Loan

If you can’t come up with an extra chunk of money to pay closing costs up front, you can fold the closing costs into your loan. This can allow you to close with less money out of pocket, but you’re going to pay those closing costs eventually anyway, and you’ll pay interest on them besides. Interest rates tend to be higher for no-closing-costs loans, and so do monthly payments. But you’ll have a shorter break-even period, and the move can make financial sense if you plan to stay in your house for a while.

Ask Your Bank for a Discount

Could saving a few hundred dollars on closing costs be as simple as asking your bank for a discount? Yes, it could. Many banks offer rebates and rewards discounts programs to customers who take out mortgages. For example, Bank of America’s Preferred Rewards members can save up to $600 on loan origination fees. 

Close Later in the Month

One of the simplest ways to reduce closing costs is to simply schedule your closing date for later in the month. Your closing costs include per diem interest costs for each day between closing day and the start of the next month. If you close on June 2, you will pay 28 days of interest per diem as part of your closing costs. If you close on June 29, you will pay for only one day of interest per diem. 

Get the Seller to Pay

In some markets, you can ask the seller to pay some or all of the closing costs of your mortgage as a closing-cost credit. It’s an incentive for the seller, since they get a tax write-off, and it may be a good way to save some money on up-front costs if you’re buying in a more sluggish market or even just buying a place that has been on the market for a while. 

Explore Special Lending Programs

Are you eligible for a special lending program? If so, you could qualify for closing-cost benefits. Military members and veterans qualify for VA loans and other assistance, including assistance with closing costs. If you’re a member of the AFL-CIO, you might qualify for closing cost rebates and discounts with the Union Plus Mortgage program. Government-backed FHA and USDA loans often offer down payment assistance and closing cost benefits to borrowers. Many states also offer state-specific programs to help single mothers, low-income families and others access closing cost benefits or down payment assistance. 

Closing costs can quickly add up, but doing a little research and lowering those costs can make getting into a home easier.

AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.