Mortgage closing costs can run into the thousands of dollars, but there are multiple ways you can work to try and reduce them. While it's inevitable that any mortgage will cost you a good deal of money upfront, most lender fees and services offer some room for negotiation and shopping.
- Which Closing Costs Can You Reduce?
- How Do You Reduce or Avoid Closing Costs?
Which Closing Costs Can You Reduce?
Whether through negotiation with your lender or shopping for third-party vendors, it's possible to reduce almost any of the closing costs on a home loan. Since a mortgage loan is meant to suit your needs as an individual borrower, lenders should be willing to accommodate you to some extent. And because most lenders will offer you very similar mortgage interest rates, some may seek to attract your business with friendlier closing costs.
In the standardized Loan Estimate that all mortgage lenders are legally bound to provide, you'll find a separate section for closing cost details. There, lenders must list out the anticipated fees for various loan services. These loan costs are separated into services you can and cannot shop for on your own.
Mortgage Closing Services
While mortgage lenders usually require you to pay for all of these services, each lender determines which items you're allowed to shop for and which the lender chooses for you. The Loan Estimate helps you identify the shoppable services and begin the process of obtaining quotes from third party service providers. In general, lenders will not budge on their choice of appraiser, and credit reporting fees are standard across all companies. However, items like title insurance are far more open to borrower input; for instance, homeowner's title insurance is often completely optional.
How Do You Reduce or Avoid Closing Costs?
Aside from shopping for the services your lender allows you to choose, you can reduce your closing costs in a number of ways. Negotiating the terms of your loan with the lender is one option; adjusting your closing date to minimize the cost of prepaid insurance is another. If you're willing to take a higher interest rate on your loan, you could also take lender credits to lower your upfront costs.
Avoid Prepaid Daily Interest Charges
Unless you're applying for a reverse mortgage, your mortgage lender will expect you to prepay the daily cost of interest on your loan between the day you sign and the day you make your first mortgage payment. Practically every mortgage agreement includes prepaid daily interest as part of the closing costs. Delaying your closing date until late in the month is the best way to minimize your prepaid interest expenses: the fewer days pass between signing and making your first monthly payment, the less you'll pay upfront.
Of course, this means that you'll have less time between covering your closing costs and paying out the first monthly installment. If your savings alone aren't enough to cover all your upfront costs, getting hit with these two expenses back to back might put too much pressure on your finances. Consider the consequences to your budget before you settle on a later closing date.
Negotiate Closing Costs With Mortgage Lenders
When it comes to costs that can't be shopped for, there's a lot that's open to negotiation with the lender. The easiest way to start that conversation is to bring in more favorable estimates from competing lenders. Since Loan Estimates are legally regulated documents that stick to the same format, you'll be able to point out specific services and items where your lender charges more than the rest. Presenting evidence that you have better options elsewhere gives the lender more incentive to waive or bring down the estimated costs —and if one refuses to budge, you can use your other Loan Estimates to choose another.
Earn Lender Credits by Accepting a Higher Rate
Taking lender credits to get a discount on your closing fees is the least efficient way to reduce closing fees, but it may be your only option in some cases. Lender credits represent a tradeoff between the upfront costs of a home loan versus the ongoing expense of interest. They allow the borrower to choose a higher interest rate in exchange for a set amount of credit that gets applied to the closing costs on the mortgage. While lender credits allow you to reduce how much you pay at signing, they inevitably cost you more in interest over the lifetime of the loan.
The safest way to approach lender credits is to calculate how much your new rate will cost you compared to the original rate. If you plan to stay in the mortgage for the full term, all you have to do is compare that difference to the amount of credit you're receiving. In almost every case, lender credits represent a loss to the borrower: you'll save less on closing fees than what you'll ultimately pay back in interest. However, homeowners who plan to sell or refinance after a few years may come out ahead, since they'll be avoiding most of the higher interest.
Of course, refinancing your mortgage comes with a whole new set of closing costs. But calculating the break-even date between your lender credits and your higher interest payments should give you an idea of whether you're getting a reasonable deal. If you find that your funds fall short of covering the upfront expenses of your mortgage, lender credits are a straightforward solution to that problem —despite the long-term costs.