What Are Mortgage Closing Costs and How Can You Reduce Them?

October 19, 2015/ Preferred Capital / Home Buying

Purchasing a home is one of the biggest and most expensive decisions you’ll ever make. This is why you’ll want to negotiate like you’ve never negotiated before. Saving money during the mortgage process should be a key priority, and one area you can really focus on is mortgage closing costs.

What are mortgage closing costs?

Closing costs are the fees you pay in order to close your mortgage. Normally there are two types of mortgage closing costs: (1) origination or lender charges, and (2) third-party charges.

Origination fees include a lender’s processing or underwriting fee, a rate lock fee, and an application fee. Third party fees are those paid to parties other than your lender and include your appraisal cost, the cost of your credit report, and title company settlement costs.

How can you keep my costs low?

There are a handful of ways you can reduce your closing costs.

1. Negotiate closing costs with your lender

The fees your lender charges can be negotiated, to an extent. To discover which costs you can negotiate, you’ll have to ask your lender directly. In addition, if you’re shopping different lenders you can obtain multiple closing cost quotes.

2. Negotiate who pays the closing costs

Besides negotiating the price of the home, you have the opportunity to barter with the seller over who’ll pay the closing costs.

Sometimes a seller may be willing to “pay” a buyer to finalize the sale on their home by paying for the buyer’s closing costs. This acts as an incentive for the buyer to close the sale more quickly. Keep in mind when you ask the seller to cover the closing costs, you’re essentially decreasing the purchase price of the home. Have this in the back of your mind when you’re negotiating the price of the home.

3. Review your loan estimate forms before committing

Before choosing a lender, go through your loan estimate forms and look for any red flags. If you notice one, ask about it.

Also, check for “junk fees.” These fees may be labeled as processing fees, warehousing fees, or some other name on the Loan Estimate.

4. Accept a higher interest rate by not paying points

Point are also known as the loan origination fee and one point is equal to 1% of the total loan amount. Points and interest rates act like a teeter totter in the sense that if you opt for lower points or no points, you’ll be getting a higher interest rate.

With some simple math you can easily calculate which scenario, no points and a higher interest rate, or points and a lower interest, would be best for you.