Guardian's Guide to Cutting Closing Costs
The Top 5 ways to cut your closing costs
Closing on a home is exciting. And expensive! As a budgeting challenge, the thousands of dollars in loan processing fees, settlement services, inspections, and up-front payments collectively known as closing costs is second only to your down payment.
Why are closing costs so high? If it makes you feel any better, part of what you’re paying for is safety. There’s a lot of work involved in making sure real estate sales are fair and airtight for both buyer and seller.
That said, it’s still a lot of money, and sometimes fees are higher than they should be. While some closing costs are virtually carved in stone, there are others you can do something about. And of those, some are more worth your time in terms of payback.
Here are the best ways to take control of the situation and save money on closing costs, starting with everyone’s favorite: get someone else to pay!
1. Track Down Some Free Money
This tops our list because A), who doesn’t want free money, and B), it’s best to get on it sooner rather than later. Some of the same programs and organizations that offer down payment assistance also help with closing costs.
Just for example, the Everyday Hero Housing Assistance Fund helps community service professionals in all 50 states cover their closing costs. To get your search started, check out our beginner’s guide to down payment assistance.
Our online homebuyer education course might be part of your strategy too. When you pass the course, you get a certificate that can qualify you for assistance programs. And besides, it gives you the unbiased information you need to make smart, confident decisions throughout the homebuying process.
2. Get Your Credit Score Up
You probably already know that your credit score has a big impact on your ability to qualify for a mortgage, and on the interest rate you’ll get. But did you know that it can affect your closing costs too?
Because it’s harder to get a loan if your credit score is low, lenders have you over a barrel. They can get away with charging higher fees. If your score is high, on the other hand, you’re considered a low risk, and banks will compete for your business.
For example, a low credit score might stick you with a higher rate on mortgage insurance. The most important consequence is that your monthly mortgage payment could be substantially bigger for years — until you have 20 percent equity in your home. But your closing costs will be higher too, because lenders typically require a month or two of mortgage insurance payments up front.
Here’s how to boost your credit score. It does take some time, so this is another one to get started on ASAP.
3. Shop Around for Title and Closing Services
Title and closing services, also called settlement services, include title insurance and, in most of the country, managing the legal documentation and exchange of money involved in buying a home. These third-party services (i.e. not performed by your lender) typically account for about 70 percent of closing costs. So shopping around, if you can, is well worth your time.
Can you shop around? The third-party services you can and can’t shop for in your state are listed on page 2 of the standardized Loan Estimate you get from each lender you submit a mortgage loan application to. Sometimes you and the seller have to agree on the settlement company. In some states, you’re required to hire a real estate attorney as your closing agent. In that case, of course you get to choose.
When shopping for title/closing services, make sure you're comparing apples to apples on price. Contact recent customers too. Were they happy with the service? Were problems handled smoothly? Weird last-minute problems crop up all the time, so don’t hesitate to pay a little extra for an agile, experienced closing agent.
4. Shop Around for Lenders with Low Fees
When you’re shopping for a mortgage loan, the interest rate isn’t the only thing to consider. The fees some lenders charge to process mortgage loans can drive up your closing costs enough to cancel out a slightly lower interest rate. So you need to take them into account. But it’s tricky.
The Loan Estimate we mentioned above outlines lender fees. In addition, some lenders will give you a separate list of their fees to refer to while you’re shopping around. One number to look at is the “APR,” or annual percentage rate. It’s meant to account for both the interest rate and a variety of fees. That’s why it’s almost always higher than the interest rate.
However, the APR makes a lot of assumptions about a lot of moving parts. So while it comes closer to reflecting the true long-term cost of the loan, it’s not perfect as a tool for comparison shopping.
We think the easiest way to do a good job with this is to target the lowest interest rate you can get and then compare fees at banks willing to give you that rate. (If you need to roll your closing costs into your loan — more on that in a minute — do the opposite: target “no-closing-cost” mortgages and then compare their interest rates.)
5. Get Both Title Insurance Policies From One Company
Title insurance covers the cost of a thorough search for problems with the deed to the property, and it protects the policy holder against loss if the true ownership is ever questioned. Very important!
Separate policies cover the lender and the buyer. In most states, the buyer pays for the lender’s policy. Whether buyer or seller pays for the buyer’s policy is a local convention and potentially negotiable. If you pay, you get to choose the company.
If your state does not regulate the price of title insurance, you might have a lot to gain by shopping around. If your state does regulate it, you’ll pay the same price no matter who you buy from. However, some companies tack on fees that boost your total cost, so watch for that. Either way, when you buy both polices from the same company, there’s usually a discount of several hundred dollars.
Just remember that price isn't the only factor. The title search is an important job, and you want a company with a good reputation.
Still Can’t Pay? Roll Your Closing Costs into the Loan
As a last resort, you can finance your closing costs with a so-called no-closing-cost loan. Of course, you’ll still want to save money by taking the steps above.
Why is this a last resort? Only because in the long term, financing your closing costs is an expensive thing to do. After all, you’ll be paying interest on that borrowed money. Your monthly payment will be higher too.
To illustrate, let’s say you finance $5,000 in closing costs. Assuming a 30-year mortgage with an interest rate of 4.5 percent, you’ll pay more than $4,000 in interest over the life of the loan (!), and your monthly payment will be $25 higher.
That said, if you’re ready to buy in other important ways, you gotta do what you gotta do. That’s why this type of financing exists.