Closing a mortgage always involves closing costs which will vary from lender to lender. Even so-called “no closing costs loans” involve paying to close the loan, even if the borrower doesn’t foot the bill, someone does.
If you want to reduce the cost of closing your mortgage, here are a few tips you can use.
But first, let’s have a clear picture of what closing costs are.
What Are Mortgage Closing Costs?
All mortgages have costs involved, and the amount varies based on several factors. The biggest distinction will be between refinances and purchase transactions.
Closing costs on mortgages for refinances are a bit lower than for purchases. The costs involved when refinancing typically are:
- Loan origination fees
- Processing fees
- Underwriting fees
- Appraisal fees
- Flood certification fees
- Credit report fees
- HOA Cert fees
- Escrow or settlement attorney fees
- Lender’s title insurance
On purchase transactions, there are some additional fees that are typical on most purchases:
- Termite inspection fees
- Home inspection fees
- Owner’s title insurance
- Hazard insurance
All the above fees are usually one-time fees that are paid as a condition of obtaining a loan or purchasing a home. In addition, you also have recurring closing costs, which are the following:
- Property tax impounds
- Homeowners insurance impounds
- Prepaid interest
- HOA dues
These fees are not all-inclusive, but they do cover the majority of cases.
When added together, the above fees typically add up to several thousands of dollars. Naturally, borrowers would like to reduce these closing costs as much as possible.
Who Is Responsible for the Closing Costs?
The party who is responsible for mortgage closing costs is the borrower. In many cases, though, the borrower can negotiate that other parties credit the borrower for all or a portion of the closing costs.
A common arrangement on refinance loans is to have the mortgage company credit the buyer with some or all of the closing costs. The exchange here is usually a higher interest rate which gives the lender a rebate on the back end, which they credit to the borrower. This is how “no closing costs loans” are created.
On home purchase transactions, the buyer/borrower can ask the seller to pay for the buyer’s closing costs. It is also possible to do a combination of lender-paid and seller-paid closing costs to reduce your closing costs down to zero.
Related Reading: 8 Closing Nightmares and How to Manage Them
Five Strategies to Lower Your Closing Costs
#1 Shop for the lender with the lowest costs. It is easier to do this on refinance transactions where the borrower is in total control of the choice of the lender without interference from other parties.
Although lender fees typically fall in a narrow range of total costs, you may be surprised at how different some lenders’ fees are. The fees that you can usually find large differences in are loan origination, processing, and underwriting fees. These are typically arbitrary amounts set by each lender. You will find they can vary by several hundred dollars at times.
Every lender has to give you a Loan Estimate (LE) when you apply for a loan. Shop around and compare different estimates line by line to make sure you are getting the lowest costs for closing.
#2 Ask the lender to give you options that include rebate pricing. As mentioned previously, lenders can offer you a slightly higher rate in exchange for some or all closing costs to be paid by the rebate.
Here is some insider info you may not get elsewhere; Rates are quoted in .125 increments (1/8th of a percent). Many times if you choose a rate that is .125 or .25 higher, the lender rebate can be substantial. It can be enough to pay all or most of your closing costs.
Here is where you want to have the lender calculate the “recapture time” which will let you know how long it will take to recover the amount of closing costs you would pay for different rates.
Let’s say that you choose a rate that offers to pay $3,500 of your closing costs and the payment difference is $75 a month. If you choose to go with the lower rate to get the lower payment, it would take you 46 months to recover your investment. That is the recapture time.
The decision you have to make then is, do you want to pay $3,500 now, or would you rather spread the amount over the 46 months? If reducing your closing costs now is high on your priority list, it would make sense to choose the higher rate and save the $3,500 now.
You can choose this strategy with the lender if your mortgage is for buying a home also. Rates and fees are interchangeable on both types of mortgages.
#3 Negotiate with the seller to have them pay your closing costs. On home purchase loans, it is possible to have the seller pay all or a portion of your closing costs.
There could be many reasons the seller is willing to accept an offer to pay your closing costs. Homes sometimes sit on the market for a while, and helping a home buyer get into the property by lowering their costs to buy is a great way to get the property sold.
#4 Have your Real Estate agent give you a credit for closing costs. When you are buying a home, it is sometimes possible to have the Real Estate company credit you some of their commission to pay for closing costs. Don’t be afraid to ask.
There are, in fact, several Real Estate companies that operate under that business model. They will collect a commission of X amount and credit the rest to the home buyer.
#5 Look for closing costs assistance from government agencies. Home purchases can qualify for a variety of grants from the local county or state government. Homeownership leads to more stable neighborhoods, and many government programs have been made available to help the local community become homeowners.
First-time home buyer grants and 2nd mortgages are offered by practically every state in the nation.
City and county governments also offer incentives for things such as energy efficient remodels and adding an Accessory Dwelling Unit (ADU) to your property. If you refinance to make any of these improvements, a grant from your city or county could take care of all your closing costs.
Reducing your mortgage closing costs is definitely possible with the right strategies. You have five different ways you can reduce closing costs for just about any mortgage.
The biggest takeaway is for you to do your research. Not all lenders are the same, make sure to talk to at least three different lenders before you make a decision.
Find a lender that will be your advocate and is looking for a long-term relationship with you rather than a transactional approach. In the end, all parties usually benefit from doing repeat business together.