Buying a home is a joyous, exciting experience— and a stressful one. Signing your name to a six or seven figure loan can make anyone squirm a little, and, thanks to buyer closing costs, it can seem like the further into the sale you get, the more the price tag goes up.
Many first-time buyers are taken by surprise with just how much buyer closing costs can tack on to the final sale price. Typically, these run to 3% to 6% of the mortgage amount; for a home at the U.S. median value of $257,000 purchased with a 20% down payment, that comes to between $6,170 and $12,300 for closing costs alone.
That’s a significant amount of money— but luckily there are ways to lower those closing costs, and save yourself thousands of dollars. Read on for a detailed rundown of what closing costs consist of, how to negotiate them down, and how you might even be able to get them waived.
Table of Contents
- Why Are Closing Costs So High?
- Loan-Related Fees
- Property Related Fees
- Tips for Lowering Closing Costs
- The Upshot
Why Are Closing Costs So High?
“Closing costs” is actually a catch-all phrase for a whole bundle of fees charged by several different service providers. Some of these individual costs are small, but there are many of them, so they can add up quickly!
Closing costs are generally split between the seller’s closing costs and the buyer’s closing costs. For buyers, these fees generally fall into two categories: costs associated with the loan, and costs associated with owning the home. Let’s look at loan costs first.
When you buy a home with a mortgage, you’re going to incur a lot of lender fees. These commonly include the following;
|Closing cost||Typical amount|
|Loan application fee||$300|
|Loan origination fee||0.5-1.0%|
|Discount points (optional)||Varies|
|Mortgage insurance application fee||$200-300|
|USDA, VA, and FHA fees||1.0-3.3%|
|Title search fee||$200|
Property Related Fees
Buyer will also have to pay closing costs that are directly related to the property itself. Here are the main ones:
|Closing cost||Typical amount|
|Homeowner’s association fees||$200|
Tips For Lowering Closing Costs
As you can see, closing costs are a bundle of many fees. While this can be confusing once you break everything down individually, it also presents you with a lot of opportunity for savings.
The list above shows that the lion’s share of closing costs come from lender fees, so your first step in lowering your closing costs should be to shop around for the best lender— and making sure you’re getting the best terms possible from whatever lender you end up using.
Compare Loan Estimate Forms
How do you do that? When you apply for a loan, the lender is obligated to provide you with a Loan Estimate form within three business days; this form lists, in detail, the fees they’d charge you. Doing a simple side-by-side comparison of these forms will quickly reveal who provides the best value.
Comparison Shop for Title Services
These Loan Estimate forms will include a section that specifically lists “Services You Can Shop For.” This section includes costs like the home inspection, the title search, the title insurance, and the settlement/closing agent.
The biggest charges here are the title service fees and the title insurance. Comparing estimates from title companies and paying attention to the total cost will let you identify the services with the cheapest rates.
Additionally, purchasing the lender’s and owner’s title insurance policies from the same company is another way you can save on closing costs. Insurers offer a lower rate — called a “simultaneous issue rate” — if you choose to buy both policies from the same title company.
Get Multiple Quotes for Home Insurance
Home insurance premiums vary widely between companies, so make sure you get estimates from several reputable companies in your area. The key word here is “reputable” — there are a lot of discount insurance providers out there that offer low prices, but may have subpar customer service, or disappear when it comes time to pay out a claim.
Do your research before you ask for quotes, to make sure you’re contacting legitimate insurance companies you’d actually want to work with.
Another great way to save on home insurance is to ask for quotes from insurance companies you already work with. If you have car, boat, or renter’s insurance, ask your agent for a quote for a homeowner’s policy. Companies often give big discounts to existing customers for bundling policies.
Negotiating Closing Costs
The previous section covered costs you can reduce through hustle and comparison shopping; this section will cover the costs you can reduce at the negotiating table.
Ask the Lender to Reduce or Eliminate Fees
As you learned from the list above, a lot of closing costs originate with the lender. So asking them to cut down some of those fees is the best place to start.
Just keep in mind that some of those fees are non-negotiable, mostly because the lender has already contracted with third-party vendors at pre-negotiated rates. These non-negotiable fees typically include appraisal fees, credit report fees, and fees associated with tax and flood determination.
So what’s that leave? The easy ones are fees like application fees; once you’ve committed to the lender, it doesn’t make sense to pay a fee to apply for a loan you’ve already gotten. Simply asking for this fee to be eliminated is often all it takes.
Look closely at your Loan Estimate form; any fees that sound superfluous or vague can often be taken out just by asking. Just remember that the larger the fee, the more difficult it will probably be to negotiate it down; for example, the lender will be very reluctant to reduce the 1% loan original fee, simply because that’s where they’re making most of their money. However, if you’re taking out a large loan, you may have some leverage there. It never hurts to ask!
Finance Your Closing Costs
This tip may not necessarily reduce your closing costs overall, but it will reduce the initial amount you pay out-of-pocket in the short-term.
Rolling your closing costs into your mortgage is a good way to work around a cash shortage at closing, and is not all that uncommon. Many buyers use their entire savings on their down payment, and then find themselves a little short on funds when it comes to closing costs.
Just know that while this can save you from shelling out thousands of dollars at closing, it can be more expensive over the long term. If you roll your closing costs into a thirty-year mortgage, you’ll end up paying much more over the course of the loan, and your lender may even raise your interest rate.
Ask the Seller for a Credit
Many buyers ask for a seller’s assist, which is essentially a small discount or giveback on the price of the home. Why would the seller give the buyer a break on the price? If the home’s been on the market for a long time, and there hasn’t been much interest, the seller may help defray the buyer’s closing costs just to get the sale across the finish line.
Just keep in mind that many conventional loans, including FHA loans, limit the amount of seller’s assist to 6%, or half that if the buyer is putting down 10% or less.
Look Into a Reissue Rate on Title Insurance
Qualifying for the reissue rate gets the new homeowner a big discount on title insurance by essentially continuing the title insurance policy of the seller. It’s a little more complicated than that, but that’s the gist of things, and it can translate to up to a 40% discount. That’s hundreds of dollars of potential savings, so make sure you look into this opportunity.
If You’re Refinancing, Skip the Appraisal
Refinancing is technically drawing up a whole new loan, so your lender may automatically request a new appraisal. If you’ve had the property appraised recently, you can ask for an appraisal waiver, to eliminate this fee.
When you unpack what closing costs actually are, you see that they’re a bundle of dozens of smaller costs— some of which are negotiable, and others which aren’t. With a lot of patience, time, and hustle, a buyer can bring those closing costs down by hundreds or maybe even thousands of dollars.
But that process could go a lot faster and smoother— and you could probably even increase your savings— if you partner with a top agent. An experienced local agent is intimately familiar with the nuts and bolts of a real estate deal, and can advise you on which fees to contest and which aren’t worth your time. They may even have inside information about service providers or sellers that can reveal hidden leverage you might have.
Real Estate Witch has partnered with Clever Real Estate to help our readers connect with top local agents. Clever agents offer a top of the line, full service sale experience for a low flat fee of $3,000, or 1% if your home sells for over $350,000, and their experience and expertise will benefit you along the entire sale process, from price negotiation to chipping away at closing costs. Contact Clever today for a free, no obligation consultation!
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