How to negotiate your mortgage closing costs
You’ve found your dream home, settled on a price with the seller and secured a tentative commitment from the lender on a mortgage. Yet, as you approach the closing, you’re concerned about mounting expenses and those pesky closing costs, and 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 typically total 2 percent to 4 percent of the home price. Fortunately, you can talk down these costs if you prepare properly.
7 strategies to reduce closing costs
1. Break down your loan estimate form
The lender is required to give you the loan estimate 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, including your loan amount, interest rate and monthly payments. On page two it has a section called “Services you can shop for,” including:
- Pest inspection
- 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
Many lenders charge loan costs, including those for 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. 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 pays some of the closing costs, the seller is typically obligated to pay others, such as the real estate agent commission. You can ask your seller to chip in for your portion, which would be reflected as “seller credits” on the loan estimate form. Keep in mind that this strategy might not work in a market like the one we’re in today, however, when sellers have much more leverage.
4. Get new vendors
Once you get your loan estimate, 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 also do your own research. Finding cheaper vendors could save you hundreds of dollars in closing costs.
5. Roll the cost into your mortgage
If you don’t have the cash available to pay closing costs, ask your lender about a no-closing-cost option. This saves you from having to have the money upfront at the closing, but it will ultimately cost you more in the long run because you’d be adding to your loan amount and paying interest, driving up your monthly payment.
6. Look for grants and other help
Different cities, counties and states have financial assistance programs for qualified homebuyers. You can explore your options with this guide to homebuyer programs by state. Many are for first-time homebuyers, and they help with down payment and closing costs. Others might require you to purchase a HUD-owned home, complete homebuyer education or be in a specific profession, like a firefighter or teacher, to qualify.
7. Try to close at the end of the month
When you close at the end of the month, you reduce 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 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.
If you’re prepared for mortgage closing costs before they hit, you won’t be surprised by the final figure. Don’t settle for what your lender quotes you, and don’t hesitate to shop around to compare costs from other lenders. You can also try to negotiate some of these costs, potentially get the seller to help with others, and look into state or local programs for more closing cost assistance.