How to Lower Mortgage Closing Costs

Michael Jensen, Mortgage and Finance Guru

Updated October 8, 2020

Mortgage closing costs are the fees that a borrower is required to pay to numerous third parties at the time a mortgage closes. Closing costs can run thousands of dollars depending on the lender, property value, location and size and type of mortgage. In many cases, home buyers are surprised to learn how much closing costs are and may not have enough money to pay for them.  This can create a significant financial challenge for many people or possible delay the home buying process.

It is important to understand that there are two types of closing costs: non-recurring and recurring. Non-recurring closing costs are one-time, up-front costs that the borrower pays to process and close the mortgage such as lender, appraisal, title company, escrow and attorney fees. Non-recurring closing costs may vary by lender and the borrower can negotiate to lower these costs.  For example, you may be able to negotiate a lower lender origination fee or title insurance fee.  Borrowers should focus on non-recurring closing costs because these are the fees that lenders and other third parties have the most control over, which potentially creates the opportunity for negotiation or discounts. 

Recurring closing costs are costs that the borrower continue to pay after the loan closes such as prepaid interest (from the day your loan closes until the end of the month in which it closes), homeowners insurance, pro-rated property taxes and homeowners association fees, if applicable. The amount of recurring closing costs you pay depends on when your mortgage closes and these costs are less subject to lender negotiation, if at all.  For example, your prepaid interest expense is a function of your mortgage rate, loan amount and closing date and property tax rates are set by your local government.  With these two items and recurring closing costs in general, your expense is basically determined by a formula and there is no room for negotiation.  You may be able to get a rebate or financial incentive to offset them, but the actual costs do not change.

With thousands of dollars at stake, it is important to think of creative ways to pay for both recurring and non-recurring closing costs.  Below we highlight how to lower mortgage closing costs.  Following these tips can help you reduce or pay for your costs which makes getting a mortgage and buying a home more affordable.

Consider a No Cost Mortgage

One of the easiest ways to reduce your closing costs is to get a no cost mortgage. With a no cost mortgage the borrower pays no non-recurring closing costs but pays a higher mortgage rate, which typically ends up costing the borrower more in increased interest expense in the long run. There are several points to consider if you are thinking about getting a no-cost mortgage.

Understand How No Cost Mortgages Work

First, make sure that the mortgage is truly no cost and ask the lender upfront what non-recurring costs you are required to pay, if any. Make sure that you are not required to pay any lender or third party costs including the appraisal, title and escrow fees. Additionally, make sure that no costs are rolled into your mortgage. Rolling closing costs into the loan amount is a clever way for lenders to make borrowers pay closing costs without charging the borrower upfront. You want to make sure that your loan amount does not increase over the course of the mortgage process.

Second, the interest rate for a no cost mortgage is approximately 0.25% - 0.5% higher than a loan with typical closing costs. A no cost mortgage may be right for you but be sure to understand the trade-off between not paying closing costs upfront and paying a higher interest rate for the life of your loan. A higher mortgage rate means your monthly payment is higher which can add up to a lot of money in the long run.

Compare Mortgage Quotes

This seems like a simple point but many borrowers fail to compare mortgage proposals from multiple lenders. We recommend that you compare mortgage quotes from at least five lenders to find the best low terms including the lowest mortgage rate and closing costs.  Comparing lenders also puts you in a better position to negotiate lower closing costs.  For example, if you find a lender that offers a low mortgage rate but higher closing costs see if that lender is willing to match the lower closing costs offered in a different proposal. The more lenders you compare, the more options and bargaining power you have.

Use our personalized mortgage quote form to compare loan terms from top-rated lenders.  Comparing quotes is the best way to find the lowest closing costs.  Plus, our quote form is free, no obligation and does not affect your credit.

Negotiate Lower Costs

When you compare mortgage quotes request a lender fees worksheet and loan estimate from the lenders. These documents, provided free of charge, outline key mortgage terms including lenders fees and closing costs. You can use this detailed information to negotiate lower closing costs or discounts for specific fees.  You should compare lender fees such as origination and administration fees as well as costs for third party services such as the appraisal report, title insurance and escrow or attorney services. You may find differences in the cost for these items, especially for third party services such as the appraisal report, and you can use this information to negotiate lower closing costs.

Learn How to Compare Mortgage Proposals

For example, if one lender is offering a lower interest rate but charging $300 more for an origination fee, negotiate with the lender to match the lower cost for the fee. Lenders are competing for your mortgage business so use this competitive dynamic to play lenders off each other and lower your closing costs.

Use a Lender Rebate to Pay for Closing Costs

Most people are familiar with the concept of a rebate when it comes to buying a car but rebates also apply to getting a mortgage, although it works a little differently.  Most lenders quote you a range of mortgage rates and there is a cost or rebate associated with each level.  Borrowers may be required to pay a cost for a lower mortgage rate but receive a rebate from the lender if they are willing to pay a higher rate.  For example, the borrower may be required to pay a fee with a 4.000% mortgage rate but received a $2,000 rebate if they pay a 4.500% rebate.  The borrower can use this rebate to offset their closing costs. 

Use our Mortgage Comparison Calculator to compare loans with different costs and rates

The amount of the rebate depends on the mortgage rate, loan amount and other factors. A lender paid rebate works similar to a no-cost mortgage because in the long run paying a higher interest rate can cost you more that the rebate you receive over the course of your mortgage. For example, you may receive a $2,000 rebate but paying the higher mortgage rate may cost you $3,000 more in total interest expense, so there is a trade-off. For borrowers who are struggling to pay for closing costs and who can afford a moderately higher monthly payment, a rebate may be a good option.

The table below shows mortgage terms for leading lenders in your area. Contact multiple lenders to understand how you can use a rebate to pay for all or part of your closing costs.

Use a Closing Cost Assistance Grant

Local and state housing agencies, departments and commissions offer grants that help home buyers pay for part or all of their closing costs. These programs are usually targeted at low-to-moderate income borrowers and are usually structured as a grant that you do not need to repay as long as you own and live in your home. Applying for a closing cost assistance grant requires extra time and effort by home buyers plus program availability and funds may be restricted.

How Closing Cost Assistance Grants Work

We encourage you to contact a HUD-approved housing department to understand grant eligibility and program requirements. For eligible borrowers, a closing cost assistance grant can make buying a home much more achievable.

Use a Lender Closing Cost Grant

Some lenders also offer their own closing cost assistance programs. Lender programs are similar to grants provided by housing agencies or departments although there are a couple of important differences. The grant must a be gift that the  applicant is not required to repay.  Also, the money from the lender can only be used to pay for closing costs and not other items such as your down payment. There grant is also capped at the total amount of your closing costs although the lender may offer a lower amount. Because these programs are relatively new, not many lenders offer them but it never hurts to ask -- every little bit helps when it comes to paying for mortgage closing costs.

Ask the Property Seller Pay Your Closing Costs

If a property owner is motivated to sell, they may pay for part or all of your closing costs. Requesting that a seller pay for closing costs is part of the property purchase negotiation. For example, if a home is listed for $150,000, you could make an offer for $150,000 and request that the seller pays $3,000 in closing costs.  From the seller's standpoint, this is basically the same as making a $147,000 offer.  Offering the full list price and requesting that the seller pay for part or all of your closing costs -- $3,000 in this example -- is a creative way for a home buyer to finance the costs because they are essentially added to your loan amount.

In a hot real estate market the seller may be unwilling to consider paying for closing costs but it never hurts to ask. If the seller does agree to pay for closing costs, this is included in the offer to purchase and factored into the transfer of funds between the buyer and seller managed by the closing agent.

Sources

"Determining Costs."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.

"Local Homebuying Programs."  HUD.  U.S. Department of Housing and Urban Development, 2020.  Web.

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