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When you take out a mortgage, you'll pay processing fees, taxes and other expenses that together make up the closing costs on your loan. Closing costs typically range from 2% to 5% of the loan amount for a home purchase, so if you take out a $300,000 mortgage, you might wind up with closing costs from $6,000 to $15,000. Not exactly small change.
Not all closing costs are set in stone, however. Fortunately, you may be able to save money by negotiating some of your mortgage closing costs.
What Closing Costs Are Negotiable?
On the day you sign your mortgage loan papers, you'll pay closing costs associated with the loan. Closing costs are typically paid upfront to the lender, though they involve several companies that work to process your loan, such as title companies, appraisers, credit reporting agencies, real estate agents and more.
While closing costs are an inescapable part of the mortgage process, negotiating closing costs is possible. Just know that some closing costs are negotiable, and others are not. Here's a rundown of some of the negotiable and non-negotiable closing costs.
Negotiable Closing Costs
Lenders may be willing to decrease or even erase some closing costs. Closing costs you may be able to negotiate include:
- Loan application fee: Lenders often charge a fee to review a buyer's application for a mortgage. But many lenders will ax this fee, particularly if the buyer already has a business relationship with the lender.
- Origination and underwriting fee: Lenders charge these fees to examine various documents submitted by a borrower as part of the loan process.
- Rate lock fee: When you're looking for a mortgage, you may come across an attractive interest rate. Because that rate could go up days or weeks later, you may be able to pay a rate lock fee to preserve the rate for 30, 45 or 60 days.
- Title insurance: In the case of a homeowner, title insurance protects against financial losses arising from issues, such as liens, that weren't apparent when the title insurance policy was issued.
- Home insurance premium: Before taking possession of your new home, you must purchase a home insurance policy. Mortgage lenders require this as part of the loan process. While you must pay this premium, you can shop around to find insurance that meets your needs.
- Agent commission: Typically, a seller pays a commission to the real estate agent who listed the home. The seller's agent and buyer's agent generally split the commission.
Non-negotiable Closing Costs
Some closing costs can't be negotiated. Why? Because the fees are fixed.
Here's a look at some of the closing costs that are non-negotiable:
- Appraisal fee: Most buyers tap the expertise of an appraiser to calculate the value of a home. The lender compares this dollar amount to the loan amount to make sure a proper value is attached to the home. An appraiser charges a fixed fee for this work.
- Government fees: Certain government-imposed fees, such as title transfer fees and document recording fees, are fixed. Therefore, they can't be negotiated.
- Credit check fee: As part of the mortgage process, a lender checks a buyer's credit score and credit history to determine creditworthiness and set the interest rate. This fee is fixed.
- Courier fees: These fixed fees pay for picking up and delivering documents needed by a title company and real estate attorney.
- Property taxes: Government entities set property tax rates. These rates aren't negotiable.
- Real estate transfer taxes. These government-imposed taxes, also known as deed transfer taxes or documentary stamp taxes, are charged when the ownership of a property changes. It might be a flat amount or a percentage of the sale price. The buyer or seller might pay these taxes, or they might share the burden.
Learn more >> Mistakes to Avoid When Closing on a Mortgage
How to Reduce Closing Costs
Aside from negotiating, you can use various tactics to reduce closing costs. Here are some cost-cutting suggestions.
Comparison Shop
When you're shopping for a mortgage lender, ask whether they're willing to negotiate fees. In addition, compare fees charged by appraisers, inspectors and other professionals who play a part in the mortgage process.
Learn more >> How to Compare Mortgage Loan Offers
Check the Loan Estimate
At the start of the application process, a mortgage lender must provide a loan estimate. Reviewing this estimate enables you to compare closing costs and other fees, and may point in the direction of which costs can be negotiated.
Purchase Lender Credits
When you buy lender credits, you pay a higher interest rate on your mortgage in exchange for reduction or elimination of the closing costs. Be careful with this strategy, though. It might cause you to pay more over time.
Seek Seller Concessions
Some sellers may be willing to pitch in to cover closing costs if you ask. But not all lending programs permit seller concessions.
Get Help With Closing Costs
Would mortgage fees and closing costs strain your budget? If so, you may be able to obtain down payment assistance from local, state and federal agencies authorized by the U.S. Department of Housing and Urban Development (HUD). If you're having trouble making the down payment, check out the list of down payment assistance programs provided by the Federal Housing Administration (FHA).
Roll In the Closing Costs
Not every lending program lets you roll closing costs and fees into your mortgage payments, but many do. If this is allowed, you can slash your upfront expenses. Keep in mind, though, that you'll end up paying more interest over the long run—including interest on the closing costs.
Boost Your Credit
Improving your credit may give you more leverage with your mortgage closing costs and interest rate. Before shopping for a mortgage, look for weaknesses in your credit history that you can correct to put you in a better position as a borrower.
Learn more >> How to Get Your Credit Ready for a Mortgage
Frequently Asked Questions
Many online calculators can help you figure out your closing costs. An even simpler way to come up with a rough estimate for closing costs is to multiply the typical share of these costs—around 2% to 5% of the loan amount—by the amount you're borrowing.
If you can't afford closing costs, explore a no-closing-cost mortgage. This kind of loan doesn't wipe out closing costs. Rather, it rolls the closing costs into the loan, meaning you'll pay these costs over time with interest.
You may be able to put some, but not all, of your closing costs on a credit card before signing the final paperwork. Costs that you might be able to put on a credit card before closing include appraisal and inspection fees. Total closing costs that can be paid with a credit card may be limited to 2% of the loan amount.
The Bottom Line
You can save money by negotiating some mortgage closing costs, such as application and origination fees. However, certain closing costs are fixed and can't be negotiated. To ensure your closing costs are as low as possible, go over all of the costs with your real estate agent and mortgage lender, and exercise your negotiating powers whenever you can.