How To Negotiate Your Closing Costs

When it comes to buying a new home, closing costs are an unavoidable evil. According to Bankrate.com, the average cost to close on a $200,000 mortgage is $1,847 in 2015, down 7.1% from a year ago. While that figure may be down from last year, that number doesn’t include the variable fees like homeowners insurance, taxes and other prepaid charges that can add $2,500 to $3,000 in costs. Not to mention these costs don’t take into account any fees that go to the attorney, which can be quite hefty in certain states. (Read more, here: Buying A Home: Close And Become A Homeowner.)

While the days of zero-closing cost mortgages are long gone, along with the housing bubble, there are ways to lower some of the upfront closing costs home buyers are required to cover. But to do that, borrowers have to first understand what the fees they are expected to pay are.  

Closing fees come in different sizes and from various places. There’s the fees the lender charges and there are also state and federal taxes home buyers have to pay. Lender fees are going to vary from one bank or mortgage broker to the next and is where you can find the most savings. However, there’s little to no room for negotiation with things like city, county and state transfer taxes, prepaid property taxes and recordation fees. (Read more, here: Property Taxes: How They Are Calculated.)

 The most common costs homeowners will face to close on the home include a land survey, appraisal, credit checks, loan origination fee, application fee and inspection fees. There’s also points a borrower can purchase to lower the interest rate on the life of the mortgage loan. The amount someone is going to pay in closing costs depends on the financial company and the mortgage-related fees it charges, the state in which the home is located and how much the loan is for. Hawaii, New Jersey, and Connecticut round out the top three most expensive states in terms of closing costs while Ohio, Idaho and Wyoming have the cheapest, according to Bankrate.com.

Not every aspect of the closing costs can be negotiated, but there are some areas that you can shop around and get a reduction in the amount you pay. Take the loan origination fee as one example. This is paid to the mortgage broker or loan officer as a commission for bringing the bank or lending institution the business. To lower the origination fee, you can ask your lender if there are any aspects of it that can be waived such as the application or processing fees. Some lenders will bundle application and processing fees into the loan origination fees while others won’t so you have to make sure to ask. (Read more, here: Behind The Scenes Of Your Mortgage.)

Part of being approved for a mortgage is making sure the house is worth the asking price and is owned by the person who says he or she is. That requires the mortgage lender to do some due diligence, and the cost of that gets passed on to the borrower. Mortgage-related fees include a title search, conducting an appraisal and a home inspection. The borrower also needs title insurance, which is often purchased from the bank’s preferred insurer.

The key word in all of this is preferred. That’s because the lender wants you to use their third-party vendors, but you don’t have. Borrowers can shop around for some of those services to get a lower price. Take title insurance as one example. The provider, the lender, recommends you may charge X each month in premiums, but that doesn’t mean a borrower can’t reach out to competitors to see what they charge. Same goes for the home inspection and survey. The prices will vary among vendors which is why shopping around can save you money. 

Ultimately your mortgage lender will have to sing off on the vendor for the mortgage process to proceed.  

When it comes to the appraisal, don’t expect to save on this one. The lender orders the appraisal on your behalf. (Read more, here: What You Should Know About Home Appraisals.)

One of the easiest ways to cut your closing costs is to shop around when it comes to who you borrow money from. That’s because one mortgage lender is going to charge more in fees than the one down the street. Most homeowners know to talk to a few mortgage brokers to get the best interest rate on their loan, but they don’t apply the same tactic to closing costs. Armed with the fees at one lender you can approach your preferred one to see if they will give you a break. The mortgage industry is a competitive one, and many lenders do have wiggle room in terms of the fees they pass on to you. Be wary if a lender offers you a credit to go toward closing costs. Often the tradeoff is a higher interest rate over the life of the loan.

Homeowners insurance is one of those things that every lender is going to require but whether or not you get it through them can save you money each month. Sure the lender would prefer you use their insurance carrier, but again you don’t have to. Getting quotes from competitors including all the closing costs should be on your to-do list. Rule of thumb: get at least three quotes, making sure to use the same coverage amount. (Read more, here: How To Shop Around For Homeowners Insurance.)

Buying a home is an expensive endeavor these days. Not only do homebuyers have to come up with a 20% down payment, but they also have to cover the closing costs and attorney fees. While you won’t get a break from your lawyer, you could reduce the closing costs your lender passes on to you. By shopping around for your third-party services like the home inspection and survey you have the potential to save big bucks. Asking your lender for discounts on the loan origination fees will add to that savings, making your closing costs a little more manageable.