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Negotiating your closing costs when buying a home could save you money. But how do you know which closing costs are negotiable and which aren't? Average closing costs often range from 2% to 5% of the total loan amount, making up a substantial portion of your overall mortgage expense. We provide a breakdown of each closing cost and how to get the lowest fees for each.
- What closing costs are negotiable?
- How to negotiate your closing costs
- How to strengthen your negotiating position
- Should you roll your closing costs to avoid fees?
What closing costs are negotiable?
Closing costs are the fees and other costs that lenders and third-parties charge you for originating your mortgage and buying your home. Banks, real estate agents, lawyers, title research companies, credit reporting agencies and the government require various services during the closing process, including drafting and reviewing loan documents, checking and updating official records, reviewing your credit profile and brokering your loan and home sale.
Not every cost is negotiable. Any fee charged by the government (such as title transfer fees or recording fees) is set in stone. Likewise, any service from a third-party provider will be difficult to negotiate with your lender. That means you won’t have much room to negotiate your credit report fee, flood determination fee or appraisal costs. Lenders outline “services you cannot shop for” on page two of the loan estimate form.
|Fees you can negotiate||Fees you can't negotiate|
|Homeowners insurance||Stamp and tax service fees|
|Title insurance||Recording fees|
|Discount points (lender credits)||Transfer taxes|
|Origination/underwriting fees||Property taxes|
|Application fees||Appraisal fees|
|Rate lock fees||Tax service fees|
|Real estate commissions||Flood certification fees|
You have plenty of opportunities to negotiate for a better mortgage. Start by negotiating for lower interest rates, discount points and lower origination fees. Negotiating these fees may dramatically reduce the total cost of your loan.
You can also typically shop for discounts on title insurance, home inspections and costs associated with the settlement, such as the closing attorney’s fees. These fees may be smaller than the origination fees, but they can add up in aggregate. For example, the Consumer Financial Protection Bureau (CFPB) suggests research shows that those who shop around on closing costs can save as much as $500 alone on title services.
Homeowners insurance — nationwide average of $1,083 per year
Normally, when you take out a mortgage, you have to pay for six months to a year’s worth of homeowners insurance. Be sure to shop for the best rate on insurance, and consider bundling homeowners and car insurance for the best rates.
The average cost of homeowners insurance nationwide is $1,083 as of the date of this writing. This is one of the few fees where the buyer has complete control over the selection process. It's therefore a good idea to shop home insurance quotes across a number of companies to ensure you're getting the cheapest rates possible.
Title insurance fees — $500 to $1,500
When you buy a house, you’ll need a “clean” title. That means assurance that nobody else has legal claim against the house when you buy it. When you buy a house, you’ll typically have to pay someone to do title research, as well as purchasing lender’s title insurance.
Lender’s title insurance, which typically costs between $500 and $1,500, will protect the lender if somebody sues and argues they have a right to the house. While most lenders will provide their own title company for the transaction, you can also request that the lender use a title company of your choosing for a cheaper rate. Keep in mind that the lender has no obligation to accept your suggestion so it's possible that they may turn you down.
Discount points — ~1% of the loan amount for each ‘point’ you purchase
Points, or discount points, are an upfront fee that you pay to lower your interest rate on a loan. A typical “point” costs 1% of the amount you borrow — that means a point for a $250,000 loan would be $2,500. By buying points you’ll pay a higher fee upfront in exchange for a lower interest rate (and lower monthly payments), the exact interest rate reduction per point isn’t set in stone and will vary by lender.
Conversely, you can also apply for lender credits, which are the exact opposite of discount points; lender credits reduce the size of your upfront closing costs in exchange for a higher interest rate on your mortgage. You can use the lender's discount points and credits to adjust your mortgage terms to your liking, but keep in mind that you will be trading upfront costs for interest rate concessions in most cases.
Loan origination fees — 1% of the loan value
Loan origination fees are associated with the underwriting process, although different lenders may call these fees by different names. For example, an application fee and an underwriting fee might constitute an origination fee for one lender, while another lender might call it an origination fee and a rate-lock fee.
Whatever it's called, a typical loan origination fee generally costs around 1% of the requested loan amount; however, this cost can vary by lender. You can find the loan origination fee at the top left corner of the second page of your written loan estimate. A loan estimate is a document that a lender gives to you after you request a loan from that lender. It's a good idea to request multiple loan estimates from different lenders to ensure you're getting the best deal around.
Real estate agent commissions — 6% of the purchase price
Most residential real estate transactions involve both the buyer’s and seller’s real estate agents. For the most part, homebuyers don’t have to come up with the cash to pay your real estate agent out of pocket. The seller typically pays both the seller’s agent (sometimes known as a listing agent) and the buyer’s agent out of the sale proceeds. A common commission is 6% of the purchase price, split between both the seller's and buyer's agent. The going rate will vary based on your local market, so ask your real estate agent for exact details.
How to negotiate your closing costs
When you apply for a loan, don’t assume that the lender will give you its best offer right away. If you don’t negotiate, you may get a worse deal than someone with identical credit and income might have gotten by shopping around. We cover some tips to strengthen your negotiating position.
Before you make an offer
Before you make an offer on a house, shop for rates from multiple lenders. By shopping early, you can get information on rates and closing costs from multiple lenders. Having this information will give you a leg up when you’re ready to negotiate on each aspect of the loan.
While you’re shopping, let the lender know that you’re looking for the best rates, and that you’re also looking at closing costs. Ask the loan officer whether the lender has rate-matching guarantees or other flexible pricing options. At this point, you won’t be specifically negotiating any loan terms, you’ll just be getting a feel for which lenders are most likely to budget on their offers so you know who to turn once you're ready to put down an offer on a house.
After the seller accepts your offer
While buyers pay most of the closing costs, you can attempt to negotiate for some concessions from the seller (or credits) after they've accepted your offer on the house. For example, you may ask the seller to pay an appraisal fee or a title transfer fee. It’s not common for sellers to pay closing costs, so ask your real estate agent about best practices in your area before you start asking for concessions.
After you get a loan estimate
When you have an accepted offer on a home, you’ll want to get loan estimates from a few lenders. Once you have a written loan estimate, negotiations can start in earnest. Talk to loan officers from multiple banks and ask whether they have room to reduce or eliminate certain fees.
Tell the loan officers about offers from other lenders. Negotiating the best deal may take a few hours or even a few days, especially if you have two or more lenders competing for your business. However, the discussions you have with your loan officers could save you some serious cash when it comes time to close.
Once you’re certain you have the best deal, let the lender know that you’re ready to move forward with them. Normally, the loan officer will let you lock in a rate at that point. Once your rate is locked in, you won’t have much room for negotiation after that— aside from a few small fees such as attorney’s fees — at closing.
How to strengthen your negotiating position
If you want to improve the likelihood of your efforts yielding lower fees, you'll need to put yourself in a good negotiating position. Here are some things you can do to strengthen your position.
The more you understand home loans, the better positioned you’ll be to negotiate with lenders. Consider taking a homebuyer’s education course before starting you’re the homebuying process. The CFPB’s website is an excellent resource for information about mortgage interest rates in your area. Check out current mortgage rates and compare what lenders are offering in your area.
Compare rates and fees
Don’t assume that your first lender will give you the best mortgage rate. Compare rates and fees from two or three lenders so that you can use other offers as leverage during your discussions with other lenders.
Improve your credit score
If you barely qualify for a home loan, you may not have much wiggle room to bargain. If you want lenders to compete for your business, improving your credit score will be an important step when transforming you into a more attractive borrower. To improve your credit score quickly, pay off all of your outstanding credit card debt and do your best to avoid taking on new loans. You can review your credit report for free and contest any errors on the report if spotted.
Give yourself extra time
Negotiating with lenders and sellers takes time. Consider taking a vacation day to spend extra time on negotiations. If you can’t take time off from work to negotiate, be sure to give yourself extra leeway between your offer and your targeted closing date. The extra long window of time will ensure that you have ample time to negotiate with lenders before you finalize the loan details.
Should you roll your closing costs to avoid fees?
If you’re OK with paying a higher interest rate (and a higher monthly payment), you could also consider a no-closing-costs loan. This type of mortgage is available from certain banks and credit unions and allows you to close your mortgage with little to no closing costs paid upfront.
Be aware that these types of mortgages rarely waive your closing costs altogether, and instead roll your closing costs into your mortgage in the form of a higher interest rate or extra monthly payments towards the end of your mortgage. It's a good idea to consider all your options to save money.