How to Negotiate Your Closing Costs

When it comes to buying a new home, closing costs are an unavoidable evil. The average cost to close on a single-family home increased 13.4% in 2021, to $6,905, according to a survey conducted by ClosingCorp. When you add in taxes, that jumps to $10,765.

Though the days of zero-closing-cost mortgages are long gone, there are ways to lower some of the upfront closing costs that homebuyers are required to cover. To do that, borrowers first have to understand the fees they are expected to pay.

Key Takeaways

  • Closing costs on a home mortgage can mount 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.

What Are the Types of Closing Costs?

Closing fees come in different sizes and from various sources. There are the fees that the lender charges, and then there are also state and federal taxes that 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 that homeowners will face to close on the home include:

  • Land survey fees
  • Home appraisal fees
  • Credit check fees
  • Loan origination fees
  • Application fees
  • Home inspection fees

A borrower may also purchase points to lower the interest rate over the life of the mortgage loan. The amount that someone is going to pay in closing costs depends on the financial company and the mortgage-related fees that it charges, the state in which the home is located, and the cost of the loan.

Tip

A common homebuying rule of thumb suggests budgeting 2% to 5% of the home's purchase price for closing costs.

States With the Highest Average Closing Costs

As mentioned, a home's location can influence how much a buyer pays for closing costs. ClosingCorp collects data on average closing costs by state each year. This table illustrates the states that had the highest closing costs for purchase mortgages in 2021, the most recent data available.

Average Closing Costs for Purchase Mortgages 2021
States With the Highest Average Closing Costs Overall  Closing Costs
 District of Columbia $29,888
 Delaware $17,859
 New York $16,849
 Maryland $14,721
Washington $13,927
States With the Highest Average Closing Costs Excluding Taxes  Closing Costs
 District of Columbia $6,502
 New York $6,168
 Hawaii $5,879
 California $5,665
 Massachusetts $4,904

Because many fees are calculated as a percentage of the home loan or purchase price, closing costs often track home prices.

How to Save on Closing Costs

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 that you pay. These tips can help with saving money on closing costs.

Know the Fees and What's Negotiable

Some closing fees are set in stone, while others are flexible. Take the loan origination fee, for 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. Lenders are also supposed to provide you with a rundown of closing fees in advance, so you can determine which are within your budget.

Part of mortgage approval is making sure that 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.

Shop Around Beforehand

When you reach a deal on a home, you have little time to shop for lenders and attorneys. Do that upfront in the pre-pre-approval phase of your home shopping. Shop before you even apply for pre-approval if you can because you may otherwise be locked in with a particular lender. It’s also important to know to the best of your estimation how much cash you will need at closing so you’re not surprised or, in the worst case, the purchase falls through because you’ve already tapped your reserves to come up with the down payment.

Title insurance in particular may be highly worth shopping around for. The provider that the lender recommends may charge however much in premiums each month, but that doesn’t mean a borrower can’t reach out to competitors to see what they charge. In 2021, the Urban Institute examined variability in title costs in several major markets and found great variability in title charges. By shopping for lower costs, homebuyers could save as much as $326 in Sacramento, Calif., for example, and as much as $528 in Broward County, Fla. The study is cited by the National Association of Independent Land Title Agents trade group.

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.

Review Estimated Costs

Be on the lookout for extra fees in the list of costs at closing in any loan estimates you get. Generally, there should be only the above-mentioned fees. If you spot any fees or charges you don't recognize or remember the lender mentioning, reach out for clarification on what those are and why they've been added to the loan estimate.

Look for Closing Cost Assistance

Consider special programs that may cover some or all of certain closing costs in certain circumstances, particularly for first-time buyers, low-income buyers, and veterans and active-duty military personnel. Some large banks will even waive certain costs for loyal customers.

In some markets, however, there may be few options, and a handful of states set the amounts, according to the National Association of Realtors. The amounts can vary state to state and even among cities and can depend on what exactly is covered, but the Realtors say to expect $1,000 on average.

You generally are expected to pay for the appraisal upfront at the time the lender orders it.

Choose the Right Lender

One of the easiest ways to cut your closing costs is to consider them upfront 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 competitive, and many lenders do have wiggle room in terms of the fees that they pass on to you. Be wary, though, if a lender offers you a credit toward closing costs. The tradeoff is often a higher interest rate over the life of the loan.

Tip

Comparing mortgage rates online can make it easy and convenient to see how different lenders measure up before you commit to a 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. And be sure to ask about discounts for bundling homeowners insurance with other types of coverage.

What Part of Closing Costs Can You Negotiate?

There are a number of closing costs you may be able to negotiate down with your lender, including application fees, fees associated with rate locks or the purchase of points and the real estate commissions paid to your agent and the seller's agent. Non-negotiable closing costs typically include things like appraisal fees, property taxes and flood certification fees.

Who Pays Closing Costs?

Both the buyer and the seller assume responsibility for paying certain closing costs. If you're buying a home, you can expect to pay between 2% and 5% of the home's purchase price in closing costs to cover things like credit check fees, appraisal fees, title insurance fees, attorneys' fees and recording fees.

Can You Still Negotiate at Closing?

Technically, a home purchase agreement is still negotiable up to the moment you sign off on the closing documents. If you have an issue or question, you can ask your real estate agent to raise it ahead of closing. Just keep in mind that attempting any last-minute negotiations may delay closing on the home.

The Bottom Line

Buying a home is an expensive endeavor. Homebuyers not only have to come up with a 20% down payment but also have to cover the closing costs and attorney fees. Though 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.

Article Sources

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  1. ClosingCorp. “Average Closing Costs for Purchase Mortgages Increased 13.4% in 2021, CoreLogic’s ClosingCorp Reports."

  2. Rocket Mortgage. “Closing Costs: What Are They, And How Much Will You Pay?

  3. The Urban Institute. “Comparing Home Closing Costs.”

  4. Federal Deposit Insurance Corporation. “Frequently Asked Questions on the Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation Functions.”