How To Reduce Closing Costs
A down payment is only part of what you need to seal the deal on buying a home. You also need to pay closing costs, which you can expect to total 2% to 5% of your mortgage amount.
To put that in context, buying a $200,000 house could require you to pay $4,000 to $10,000 in closing costs. If you’re feeling stressed about coming up with the money to pay closing costs, you should know that there are ways to lower the total.
Here’s how to reduce closing costs on a mortgage and save money.
Are Closing Costs Negotiable?
There’s no way around many closing costs. However, you can negotiate with the seller to get them to pay some costs using what are known as seller concessions. You may be able to talk the seller into either paying specific closing costs — like the appraisal and the real estate agents’ commissions — or a certain percentage of the total closing costs.
Another way to reduce your closing costs is through lender credits. If you go with this option, the lender will reduce your closing costs in exchange for a higher interest rate. While this means you won’t have to pay as much upfront, you’ll pay more overall in the long run.
Tips To Lower Closing Costs
Here are some ways you may be able to reduce your closing costs.
Compare loan estimates from different lenders
After you apply for a mortgage, your lender will give you a loan estimate that includes an estimate of your closing costs. While the figures listed on the loan estimate aren’t final, you can compare them with estimates from different lenders to find the best deal.
Lenders aren’t the only thing you can shop for. There are third-party services — such as inspections and appraisals — that you can shop around for. You’ll also want to compare different companies offering homeowners insurance and title insurance.
Negotiating to get the seller to pay some of your closing costs can help you save money in a major way. You may find that the seller is eager to offload the house and willing to sweeten the deal. This is where it really helps to have an experienced real estate agent on your side.
Time it right
Believe it or not, picking the right day of the month for your closing can actually save you money. That’s because you have to pay a per diem on interest from your closing date through the end of the month. This means if you close on May 1, you’ll have to pay a month of additional interest. But if you close on May 30, then you only have to pay that one day of interest.
Closing Costs FAQ
Here are answers to some common questions about closing costs.
Can I negotiate closing costs with the lender?
One of the most effective ways to reduce your closing costs is through lender credits. With this option, the lender will reduce your closing costs but increase your interest rate in exchange. If you can’t afford your closing costs otherwise, lender credits can make buying a home more affordable — as long as you’re willing to make higher monthly payments and pay more interest overall.
Can I use a credit card for closing costs?
It might be possible to use a credit card, but it’s not the best method. Before approving your mortgage, your lender will verify that you can afford the loan — which includes your closing costs. If you have to borrow money to pay your closing costs, the lender may see that as a red flag. Also, credit cards often have limits on unusually high charges.
If you’re willing to pay more interest to your credit card company, then you might as well get lender credits instead. You’ll still be paying interest, but at least it will help you reduce your closing costs.
What do closing costs include?
Closing costs include a variety of fees associated with your mortgage, such as:
- Loan costs.
- Property costs.
- Documentation costs.
- Government costs.
- Homeowners association costs (if applicable).
- Insurance costs.
- Third-party services.
- Title costs.
For more details, check out this complete list of closing costs.