How to negotiate your mortgage closing costs

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You’ve found your dream home, settled on a price with the seller and secured a tentative commitment from the lender on a mortgage, You can almost feel the keys to the home in your hand.

Yet, as you approach the closing, you’re concerned about mounting expenses and are thinking about those pesky closing costs. You’d like to leave the closing with your shirt, so you’re looking for ways to make some of these costs go away–or, at least, to reduce the damage.

The answer is to negotiate.

Charged by the lender and other vendors, closing costs often total 2 to 4 percent of the home price. This adds up to thousands.

Haggling over the sale price of the home is one thing, but can you talk down closing costs? Yes–if you prepare properly.

Strategies to reduce closing costs

1. Break down your loan estimate form

The lender is required to give you this form within three days of completing a mortgage application. But there’s nothing keeping them from giving it to you sooner–so ask for it.

This form includes an itemized list of costs. Here’s an example from the Consumer Financial Protection Bureau. It includes your loan amount, interest rate and monthly payments. On page two it has a section called “services you can shop for,” including:

  • Pest inspection
  • Survey
  • Fees for the title search and the settlement agent, and for the insurance binder

The vendors listed on the form are your lender’s preferred vendors–but you don’t have to use them (though lenders prefer that you do because they have various connections with them and steer business to each other). Instead, you can shop around to find lower fees.

2. Don’t overlook lender fees

Lenders charge loan costs, including those for loan origination and underwriting. You might not be able to get out of them, but you can try to get your lender to knock them down. There’s no harm in asking. It’s better to ask for a discount and get denied than to not ask at all.

It’s also a good idea to compare offers from other lenders. If you can get an estimate before you submit your application, try to get different loan estimate forms from different lenders to compare.

3. Understand what the seller pays for

Who pays what closing costs? While the buyer, will pay some of the closing costs, the seller is typically obligated to pay others.

Sellers usually pay the real estate agent commission and, depending on the market, might contribute toward closing costs. You can ask your seller to chip in, which would be reflected as “seller credits” on the loan estimate form.

4. Get new vendors

Once you get your loan estimate, hustle to find alternative, lower-priced vendors for different services. You should do this as soon as possible because, once you hire them, these vendors will need time to prepare the necessary paperwork.

Your lender might be able to provide a list of vendors that are less expensive than the one they have on the loan estimate form, but you can do your own research. Finding cheaper vendors could save you hundreds of dollars in closing costs.

5. Fold the cost into your mortgage

If you don’t have the cash available to pay closing costs, ask your lender about options. They might offer a way to roll the closing costs into the loan.

This might save you money at closing, but it will ultimately cost you more in the long run because you’d be adding to your loan amount and paying interest on this, driving up your monthly payment. But if you’re short of cash for closing, this might be a good solution for you.

6. Look for grants and other help

Different cities, counties, and states have financial assistance programs for qualified homebuyers. Start in your municipality by contacting agencies that are likely to have an up-to-date list of such programs. Many are for first-time homebuyers, and they help with down payment and closing costs.

7. Try to close at the end of the month

This reduces your cash outlay at closing by reducing the number of days to which the per diem interest is applied before your first mortgage payment is due–usually on the first of each month. To see how much you’d save, just multiply your loan amount (the total amount financed) by your interest rate — for instance, if your rate is 3 percent, multiply by .03 — to get your annual interest expense. Then divide that figure by 365 to get your daily interest charge. Next, multiply that figure by the number of days left in the month. If you close toward the end of the month, this figure would of course be much lower than closing mid-month.

8. Ask about discounts and rebates

Did you ever go to buy a car and find out about rebates that you didn’t know existed? The same may be true with mortgage loans, as some lenders offer incentives to attract borrowers. These rebates can knock down various costs a few hundred dollars–easy money for the time it takes you to ask. You never know what you may find.

Bottom line: Closing costs don’t have to hurt you

If you’re prepared for mortgage closing costs before they hit, you won’t be surprised by the final figure. You can negotiate some of these costs and potentially get the seller to help with others. Don’t settle for what your lender gives you and don’t hesitate to shop around to compare costs from other lenders.

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