Every real estate transaction includes closing costs. Higher home prices mean higher closing costs, so we asked real estate experts to share strategies to save money on this part of the transaction.
Christian Wallace, head of real estate services at Better, a homeownership company whose services include mortgage, real estate, title and homeowners’ insurance, in Dallas-Fort Worth; Sean Cahan, CEO of Cornerstone First Mortgage in San Diego; and Bill Rozek, a senior loan officer with Embrace Home Loans in Rockville, Maryland, all responded via email. Their comments were edited.
Q: How much should consumers expect to pay for closing costs?
Wallace: Usually, closing costs range anywhere from 2% to 5% of the total mortgage amount. Generally, the higher the amount of the loan, the lower the percentage of closing costs you’ll need to pay because a number of closing costs are fixed. Some of the fees levied at the closing table — namely taxes like the real-estate transfer tax that’s imposed on the transfer of property within a jurisdiction — will vary depending on the state, county or municipality.
Rozek: Closing costs for a home purchase will be higher than a refinance because the property is changing hands. Each state and county will have a formula for what those fees will total.
Q: Are there some costs that cannot be negotiated or are the same across all lenders?
Cahan: Title insurance fees are set by each state. Appraisal fees are subject to market conditions and have climbed significantly over the past year.
Rozek: Very few closing cost items are charged directly by a lender. At my company, we only have an administration fee to process the loan. The rest of the lender closing costs are pass-through items such as credit reports, appraisal fees and homeowner association. A lender can offer a “lender credit” to offset some fees, though.
Wallace: Closing costs include some fees that are fixed, fees you can shop around for and fees that are negotiable. It’s possible to have some third-party fees waived, like the appraisal fee in specific instances. Shop around on costs associated with homeowners’ insurance and title insurance, and negotiate fees like realtor commissions. Taxes, like the real-estate transfer tax, are fixed — though the amount varies depending on the jurisdiction — and some third-party fees like the notary fee are also fixed. The fees that are fixed and unavoidable include the credit report fee, flood certification fee and any HOA fees depending on the property.
Q: Any tips on how buyers can negotiate or lower their other closing costs?
Cahan: Sellers can pay up to 3% of the purchase price toward the buyer’s closing costs — potentially leaving no closing costs to pay for the buyer on bigger-ticket transactions — though this is unlikely in today’s seller’s market. Also, the borrower can pay a higher interest rate and pay no closing costs.
Rozek: The best advice I can give is to look at the costs associated with the rate you’re receiving. If you’re being charged points to receive a certain rate, that can sometimes be negotiated. Or you can shop around for a lender offering the same rate at a lower cost. But remember, what a lender is charging does not include the third-party costs. The lender doesn’t control these fees, but they’re included as separate line items in the loan estimate.
Also, the new software from Fannie Mae and Freddie Mac has a massive amount of information, which will often allow a loan to be processed with an appraisal waiver in the file. This means that they agree with the value and do not require an appraisal to be delivered with the file, which can save the borrower hundreds of dollars. A typical appraisal costs an average of $500 to $600.
Wallace: Working with a digital lender provides the opportunity to cut back on closing costs as technology enables these kinds of lenders to get rid of lender fees, origination fees, application fees and loan officer commissions. More ways to save include rolling closing costs into the total mortgage loan, requiring less cash up front, and shopping around for homeowners’ insurance and title insurance to ensure you’re getting the best deal. Some lenders may also be willing to offer discounts on closing costs or offer lender credits in exchange for a higher interest rate, so be sure to ask your lender which options are available.
Q: Can anything be done to lower the cost of title insurance?
Rozek: Most title company fees are relatively close in price due to competition. Lender title insurance is required by all lenders to insure there is a clean chain of title. Most home buyers will opt for “Owners Coverage” title insurance, which covers their equity and gives them a significant discount on any future refinance lender policies on that property. Also, the title insurance on a home purchase will often be slightly higher than a refinance because the title is changing hands.
Wallace: There are a few ways to save on title insurance. The first and most important is to know that you can shop around costs for title insurance, so do that to make sure you’re getting the best deal. Homebuyers can also negotiate the extra fees added on top of their premium. There won’t be much variance in premiums from one insurer to the next. However, extra fees like courier charges and copy fees can be negotiated. Lastly, homebuyers can request sellers pay for their policy, though this option might not be easy to float in a hot seller’s market.
Q: Does it help to choose a closing date early or late or in the month to reduce cash needs?
Cahan: Closing at the end of the month reduces the amount of cash you pay for interest on the new loan. But it also has your former loan collecting interest for longer.
Wallace: There is a benefit in closing later in the month because of how mortgage interest accrues from the date you close through the end of the month. Meaning, the later in the month you close, the less interest accrues for homebuyers to pay out of pocket. With that said, the later in the month homebuyers close, the sooner they have to start making their mortgage payments, due on the first of the month 30 days after the closing date. So it really depends on your personal situation. Closing at the end of the month costs you the least amount in prepaid interest, but offers less time until your first mortgage payment is due, while closing earlier in the month will cost more in terms of prepaid interest due upfront, but you’ll have more time until your mortgage payments start.
Q: What does a “no closing cost” loan mean?
Rozek: There are many ways to look at “no closing cost” refinances. You can increase your loan amount to include your costs, so that you don’t have to write a check for the costs at closing. This, of course, increases the amount of your current mortgage balance to cover those costs. Lenders also offer the option of a higher interest rate to cover closing costs. The higher rate on the loan increases the lender’s profit, which they use as a lender credit to pay your closing costs. This reduces your upfront cost, but you make a higher payment over the life of the loan.