How To Save On Mortgage Closing Costs

You worked hard to save for a down payment and have enough to qualify for a loan on your first home. But there are other costs that you have to cover wrapped into the category called “closing costs.”

An important part of your loan research is to understand how much these costs are.

Determining Closing Costs

You will see your estimated closing costs as part of the loan estimate provided by your lender. You can expect a loan estimate within three business days after your lender receives your application. Here's an example for a fixed-rate mortgage. 

It's important to carefully look over the estimated closing costs and compare them if you applied with several lenders; closing costs will vary.

As a rule of thumb, you can expect closing costs to add upt o between 2% and 5% of the loan amount excluding the down payment.

Look First To Lower Your Costs

Closing costs include several different fees and services. Not all costs are paid for by the homebuyer. The amount shown on the loan estimate includes a line titled "seller credits."

Some closing costs can be negotiated with the seller. Yet some costs are customarily paid by the buyer, and the seller normally pays others.

Still, just because these are customary doesn’t mean they cannot be negotiated.

Prorated costs such as loan interest can be significantly reduced by closing at or near the end of the month.

If you have been a renter, this might be a new concept to you, because you pay rent in advance, at the beginning of month.

When you borrow money, you pay interest based on how long you have had the money, at the end of month.

By closing near the end of the month, you only borrow the money for the last few days of that month.

Your prorated interest is based on you having the money for three or four days at the end of the month.

If you close on, say, the 2nd of the month, the intererst will be prorated for 28 or 29 days.

Closing costs can be seriously reduced by minimizing prorated interest if you're a renter. 

Your rent is already paid through the end of the month. But you won’t owe on the new mortgage until the end of the next month.

By closing on the 28th or 30th of the month, you only pay for the loan a couple of days.

You already have next month’s rent money in the bank, but you won’t be paying rent. You can apply that saved rent money toward your closing costs.

The same applies to other prorated costs like insurance, lowering the amount needed for the closing. 

More Tips For Saving On Closing Costs

Go back to your loan estimate form. Section C lists services that you can shop for. Take advantage of obtaining quality services at the most reasonable rates.

Also, compare the final terms and costs with what was previously estimated by the lender, and have them correct or explain any discrepancies.

You can also request that they use lower-cost providers to reduce the original estimated fees. Don’t hesitate to ask to have unnecessary fees removed.

Closing costs can be drastically reduced by asking for some or all of the costs to be rolled into the loan amount. These are known as "no closing cost" or "zero closing cost" mortgages. 

Ultimately, you pay more for these loans: your lender may charge a slightly higher interest rate. And it will increase the loan amount, meaning that you will pay interest on the closing costs because you borrowed the money.