When it comes to buying a new home, closing costs are an unavoidable evil. The average cost to close on a single-family home was $3,339 in 2019, according to a survey conducted by ClosingCorp. When you add in taxes, that jumps to $5,749.
While the days of zero-closing-cost mortgages are long gone, there are ways to lower some of the upfront closing costs homebuyers are required to cover. To do that, borrowers first have to understand what the fees are that they are expected to pay.
- Closing costs on a home mortgage can mount up fast.
- Taxes are not negotiable, but other closing costs, such as origination fees, can be.
- It pays to shop around on some closing costs, such as title insurance, home inspection, and a home survey, to get the best deal.
Understand the Different Costs
Closing fees come in different sizes and from various sources. There are the fees the lender charges and then there are also state and federal taxes homebuyers have to pay. Lender fees are going to vary from one bank or mortgage broker to the next, and this is where you can find the most potential savings. On the other hand, there’s little to no room for negotiation with things such as city, county, and state transfer taxes, prepaid property taxes, and recording fees.
The most common costs homeowners will face to close on the home include a land survey, home appraisal, credit checks, loan origination fee, application fee, and home inspection fees. A borrower may also purchase points to lower the interest rate over 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.
In 2019, the highest average closing costs, excluding taxes, were in the District of Columbia ($5,723), New York ($5,612), Hawaii ($5,388), California ($5,064) and Washington ($4,538), while the lowest were in Indiana ($1,909), Nebraska ($1,952), Iowa ($1,954) South Dakota ($2,002), and Arkansas ($2,056).
These Fees May Be Negotiable
Not every aspect of closing costs can be negotiated, but there are some areas where 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 be sure to ask.
Part of being approved for a mortgage is making sure the house is worth the asking price and owned by the person who says they own it. 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, 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 is “preferred.” That’s because the lender wants you to use its third-party vendors, but you don’t have to do so. Borrowers can shop around for some of those services to get a lower price. Take title insurance, for example. The provider that the lender recommends 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. The same goes for the home inspection and survey. The prices will vary among vendors, which is why shopping around can save you money. Ultimately, though, your mortgage lender will have to sign off on the vendor for the mortgage process to proceed.
When it comes to the appraisal, though, don’t expect to save. The lender orders the appraisal on your behalf.
The home appraisal is ordered by the lender, not the borrower, so you can’t shop around for that.
Negotiate Up Front With Lenders
One of the easiest ways to cut your closing costs is to consider them up front as you're shopping around for a mortgage lender. Most homeowners know to talk to a few mortgage brokers to get the best interest rate on their loan, but then fail to apply the same tactic when it comes to closing costs. One lender may charge more in closing fees than another one down the street. Armed with that information, you can approach your preferred lender to see if it 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, though, if a lender offers you a credit toward closing costs. Often the tradeoff is a higher interest rate over the life of the loan.
Save on Homeowners Insurance
Every lender is going to require homeowners insurance, but whether or not you get it through your lender could determine how much you pay for it each month. Get quotes from at least three insurance companies or brokers, making sure to use the same coverage amount.
The Bottom Line
Buying a home is an expensive endeavor. Not only do homebuyers have to come up with a 20% down payment; they also have to cover the closing costs and attorney fees. While you won’t get a break from your lawyer, you can reduce the closing costs your lender passes on to you. By shopping around for your third-party services, such as 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 more savings, making your closing costs a little more manageable.