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The bill for closing costs is the final hurdle between home buyers and their new homes, and it can represent a surprising chunk of money. Closing fees run between 3% and 6% of the mortgage; that's around $9,000 to $18,000 on a $300,000 home. (Use this closing costs calculator to estimate fees on your purchase.)
The impulse to just pay up and move in is understandable, but you wouldn’t buy a car or a TV without researching prices on other, similar products. Same goes here. And cutting these closing costs even a little could help you buy a new stove or outfit the nursery.
Strategy No. 1: Compare lenders' 'Loan Estimate' forms
Your closing costs are technically first itemized in the three-page “Loan Estimate” form that your lender must produce within three business days after you apply for a mortgage. It’s a little-known fact, but some lenders will give you a Loan Estimate form even before you apply for a loan, although it's not required. (Note: You’ll receive a final “bill,” called a “Closing Disclosure” form, three days before closing.)
The Loan Estimate lets you comparison shop between companies' total costs and also dig into specific fees once you've chosen a lender.
You need the legally binding Loan Estimate to compare costs, not the “closing costs worksheet” or a “fee itemization” that some lenders offer, says Erik Martin, president of Total Mortgage, a national mortgage company based in Milford, Connecticut.
Strategy No. 2: Know where the savings are
The bottom of the first page of the Loan Estimate form shows the total closing costs and cash needed to close the loan. The heart of your savings is Section C, page 2: “Services You Can Shop For.” These fees include:
Title search, which investigates a property’s history for restrictions or liens.
Title insurance binder, which covers the buyer and seller during the transfer process.
Lender’s title policy, which protects a lender in case of a problem with the title.
Settlement agent, also called an escrow agent or closing agent, who represents the buyer and oversees the closing and legal transfer of title.
Of these fees, you stand to save most on the priciest services: title insurance and settlement services, which are often combined. Comparison shopping among pest inspectors or surveyors might not uncover great price differences, but it doesn’t hurt to ask.
Strategy No. 3: Push back on lender fees
A lender might charge a flat fee that wraps in services such as underwriting and originating, while others charge for each separately. That’s fine. However, Martin says, “When you start seeing more than one, definitely two, three, four or five line items of itemized charges to a mortgage company, they’re nickel-and-diming you.” That’s true of bills for any closing service, he adds.
And watch out for fees with vague names, such as a “funding fee” or “delivery fee.” If you see these fees, ask your lender about them. It might remove certain fees, or you might need to look for a different lender that doesn’t charge as many.
Strategy No. 4: Shop for title and settlement services
If you're going to shop for title and settlement service providers, move quickly. These firms require time for research and preparing documents.
The companies your lender recommends might be good deals. Perhaps your lender negotiated a volume discount, or knows a particular company’s service is outstanding, Martin says. But do your own online research and ask friends and family for referrals.
“How much can you save here? Possibly hundreds of dollars.”
You can generate competing quotes on online marketplaces. On Austin, Texas-based TitleClose.com, for instance, companies pay a $325 annual fee to be listed. Shoppers enter information about their property and mortgage, including address, price, property type, closing date, whether there’s a mortgage and, if so, for how much.
Searching in a city yields around 25 to 40 itemized quotes; searching a smaller town delivers roughly a dozen, says Cara Ogrodowski, TitleClose vice president. You can rank your quotes by price, distance or customer ratings and learn average fees in your community for your loan amount, among other details.
How much can you save here? Possibly hundreds of dollars, Ogrodowski says. Bear in mind that potential savings vary by location since each state’s insurance regulations affect prices differently.
Tips for shopping for title and settlement companies:
Don’t get mired in details. One settlement service will list certain items as buyers’ costs; another as sellers’ costs. Ignore that, says Steven Palmer, CEO of Entitle Direct Group, a Connecticut-based title insurance and settlement company operating in 40 states through EnTitle Insurance Company. Just compare total prices, checking that each quote includes identical services, Palmer says.
Low fees aren’t everything. Service also counts for plenty, so consider customers’ recommendations.
Strategy No. 5: Ask the seller to contribute
Depending on the market and the home, a seller might contribute money toward your closing costs. However, inventories are low in many places these days, and buyers are competing aggressively, so sellers don’t make many concessions.
Strategy No. 6: Consider a 'no-closing costs' mortgage
A no-closing costs mortgage can be helpful if you’re short on cash. But the closing costs that you don’t pay upfront will be folded into the loan, which will increase your monthly mortgage payments.
Strategy No. 7: Sign loan papers near the end of the month
Reduce your cash outlay at closing for prepaid or “per diem” interest for the period between your loan closing and the start of the new month. How much can you save? Find out: Multiply your loan amount by your interest rate — for instance, 4% = .04 — to find your annual interest charge. Dividing that by 365 gives the daily interest charge. Now, multiply that figure by the days left in the month to see the savings.
Strategy No. 8: Ask your bank about discounts and rebates
Some banks offer existing customers incentives on their mortgages. Two examples: Wells Fargo’s My Mortgage Gifts program rebates eligible borrowers $500 on a home purchase or $300 for a refinance. Eligible Bank of America Preferred Rewards members can save from $200 to $600 on the origination fee.
You can negotiate closing costs
By now, you should realize that practically all closing costs are negotiable. It’s not just the “Services You Can Shop For” section of the Loan Estimate; you can substantially whittle down the charges you pay by asking questions — and most importantly, by comparing fees and service charges from more than one lender.