How to Reduce Closing Costs

Closing costs — the fees and taxes you pay when you “close” or finalize the purchase of a home — can add up quickly and deliver an unpleasant surprise just as you’ve reached the finish line to buy your home.

But it doesn’t have to be that way. When you apply for a mortgage, the lender must provide you with a “good faith” loan estimate within three days of receiving your application, which spells out an estimate of closing costs before you can assume ownership of your new home. You can dial in on the areas where you can save money so you have more to spend later fixing up your new home. 

Understand costs of closing

Closing costs are one of the top stressors among the nearly 90% of recent buyers surveyed who reported they found at least one aspect of the buying process stressful. It’s easy to see why. Closing costs add between 2%-5% to the purchase price, according to Zillow estimates. That means if you were buying a typical U.S. home valued at $350,000, closing costs would run you between $7,000 and $17,500 on top of the price of the home. For a more accurate estimate, use Zillow's closing cost calculator.

Some of the larger closing charges include prepaid items that you’ll have to pay for as a homeowner anyway, including property taxes for the remainder of the year and homeowners insurance. Others are fixed costs associated with things like recording the sale, special real estate taxes and the appraisal required by your mortgage lender.

But there are other fees that vary among lenders and providers. And you may be able to negotiate with the seller over who pays what.

Here are five things you can do to reduce the chance of unexpected costs and stress at closing.

1. Shop around for third-party services

Lenders often have their go-to sources for closing service, but you’re not obligated to use them and you could save money going elsewhere.

According to the Consumer Financial Protection Bureau, those services are listed on section C of page 2 of your good faith loan estimate. At the beginning of the loan process, you can opt for companies that are not on the list, provided your lender agrees to work with them.

(Note: If something important changes about the loan or what it will cost you to borrow and close the loan, the lender must provide a revised estimate. Be sure to compare the documents so you understand what has changed and why.)

Ask your agent and family and friends for recommendations, and shop online as well. Compare costs and be sure to check out the companies’ ratings, customer reviews and any complaints against them with the Better Business Bureau.

Shopping options may vary among lenders but typically include the following:

Title services

These include title insurance, title search and other costs of providing title insurance, which protects you and the lender against a loss if there’s a property ownership dispute.

Homeowners insurance

Mortgage lenders require buyers to obtain homeowners’ insurance and maintain it for the life of the loan. There are many companies that provide homeowners’ insurance, and you may be able to find the best price by insuring your home and automobile with the same carrier.

Closing services

Title insurance companies conduct closings in most of the country, according to the federal CFPB. Western states tend to use escrow agents, who coordinate the signing with each party separately. In the Northeast and South, some states require sellers and buyers to each have their own closing attorney.

2. Negotiate a closing credit with the seller

In a typical sale involving agents, the seller pays the majority of the costs and the buyer pays others.

When you’re negotiating with the seller for the sale of the home, you can ask the seller for a credit that will cover some of the costs that might otherwise fall to you. The seller has a greater incentive to provide a credit when the market favors buyers, but if your offer includes concessions around timing or other things that are important to the seller, they might be willing to give a little in return.

3. Schedule the closing date close to your move-in day

On closing day, you prepay loan interest property taxes and homeowners’ insurance for the current month. You may have some expenses that can be prorated if your closing date is in the middle of the month, but you still want to consider timing the close so it falls close to your moving day to help avoid paying for expenses on an empty home. Just be sure to provide breathing room for last minute issues that could delay the closing.

4. Challenge lender fees

You’re likely to see an assortment of fees, including courier fees, funding fees and others. Question them when you shop for a mortgage lender, and if they seem excessive, consider a lender that will give you a great rate and terms without hitting you with relatively small costs that quickly add up.

5. Opt for a loan without closing costs

Some buyers who don’t have the extra cash for closing or who want to save their money to improve the property may opt for a loan that includes no upfront closing costs.

With such loans, you’re not avoiding the costs; you’re paying them over time.

According to the Federal Consumer Financial Protection Bureau, loans without closing costs will typically charge you a higher interest rate on your mortgage or roll those costs into the loan so that you’re paying them with interest for as long as you have the loan.  Both options increase the cost of the mortgage, so be sure you understand what those costs will look like over the course of the loan, whether you’re getting a 15-year or 30-year mortgage.