“Buying a home involves more money out of pocket than just the down payment,” Michele Hammond, vice president of lending with Cross Country Mortgage, told The Balance via email. For many homebuyers, coming up with that significant amount of cash at closing can be a barrier to homeownership. The good news is that it’s possible to get assistance with closing costs to make them more manageable. “While there is no way for a buyer to completely avoid paying these fees, there are ways that home(buyers) can save on them,” Hammond said.
What’s Included in Closing Costs?
Even if you’ve secured a mortgage to purchase a home, you’ll still need some cash on hand when the sale closes. And depending on the house, location, and situation, it may be quite a bit of cash. There are several fees and other expenses associated with financing a home. These are known as the closing costs, and they’re typically 3% to 5% of the total loan amount borrowed. “Closing costs when purchasing a home include many fees, such as mortgage application fee, loan origination fee, credit report fee, title search, home appraisal, property survey, prepaid daily interest charges, mortgage insurance, and many more,” Xavier Epps, a personal finance expert and author, told The Balance via email. While most of the below fees are required, it is possible to have some of them lowered or even cut completely.
Types of Closing Costs
Private Mortgage Insurance (PMI)
If your down payment is less than 20% of the home’s purchase price, you will likely be required to pay private mortgage insurance (PMI). This cost is usually rolled into your monthly mortgage payments, but sometimes, lenders require the premium up front at closing.
Mortgage Points
If you choose to pay points to lower your interest rate, they’re paid to the lender at the time of closing.
Loan Origination Fees
These fees cover the administrative cost of underwriting and processing your loan. They are paid to the lender at closing.
Appraisal Fees
Part of the underwriting process includes having a third party come up with the fair market value of your property and house. This is known as a home or property appraisal. An appraisal can cost $300-$400 but depends on the size of your home and property. It is usually paid for in the days leading up to the day you close on your home.
Title Insurance
If you choose to secure homeowners title insurance (it’s optional), the one-time premium is due at closing. The average cost is around $1,000, but can vary greatly depending on the insurer and the property.
Homeowners Insurance
To finance a home, you’re required to secure a homeowners insurance policy. Usually, the first year’s premium must be paid as part of your closing costs.
Property Taxes
Once your loan closes, the property’s value is reassessed and up to six months’ worth of property taxes are usually due at closing. This amount is sometimes referred to as a tax service fee.
Closing/Escrow Fee
This fee is based on the purchase price of your home, the location of the property, and your lender. It is paid to the escrow agency that helped with closing the sale.
Attorney Fees
Depending on your state, you might be required to hire an attorney to help with the closing process. Closing will likely take place at your attorney’s office, so you’ll likely pay the fee on the day you close. The fee could be a few hundred dollars or more than $1,000, depending on your location and situation.
Closing-Cost Assistance Programs
Aside from negotiating down your own closing costs (more on that in the next section), there are programs on the national and local levels that can help you cover these expenses. Often, these programs offer a combination of closing-cost and down-payment assistance. Some lenders provide a lender credit of up to $7,500 that can be used toward non-recurring closing costs such as title insurance and recording fees, or to permanently buy down the interest rate. Borrowers aren’t required to pay these funds back, although eligibility is based on factors such as income, location, and more. Chase offers a homebuyer grant program, which provides $5,000 toward closing costs and down payments for borrowers who buy a home in one of 6,700 minority U.S. neighborhoods. Qualified customers can receive an additional $500 by completing a certified education course and getting a DreaMaker mortgage through Chase. You may also find homebuyer assistance programs through the U.S. Department of Housing and Urban Development (HUD). Also check with your local or state Housing Finance Agency for programs designed for low- to moderate-income homebuyers as well as first-time buyers. To get help paying for your closing costs, you may need to meet certain eligibility requirements. This may include income, location, type of house, and more. Be sure to ask what type of information and documents the program or agency needs before applying for help.
How To Lower Your Closing Costs on Your Own
Sometimes you can get your closing costs lowered on your own without help from grants or other assistance programs.
Review Your Lender’s Fees
Whenever you take out a mortgage, the lender is required to provide you with a document known as the loan estimate. This document includes a detailed breakdown of your closing costs. Once you move forward with the loan, you’ll also receive a document known as the closing disclosure. Review all the fees listed in both documents, looking for costs that seem excessive or redundant. If you think you’re being charged too much, ask your lender and see if you can negotiate the closing costs. Ask your lender and any third parties involved in the process if they can lower any of the fees. Some of the fees you can negotiate include title insurance, homeowners insurance, mortgage points, and application fees. Not all fees will be negotiable though, so be prepared to pay at least some closing costs.
Shop Around for Certain Services
If you aren’t able to negotiate certain fees, you can shop around for a different provider. While the specific services you’re allowed to shop for vary by lender, you can generally do this with any of the fees listed on page 2, in section C of your loan estimate.
Negotiate With the Seller
Sellers may be responsible for paying some closing costs, such as title insurance and real estate commissions. However, you can also negotiate with the seller to pay some of your closing costs. These are known as concessions, and sellers tend to agree to concessions if it’s more of a buyer’s market or they’re in a hurry to get their home sold. However, keep in mind that there are limits on how much the seller can contribute for conventional mortgages, as well as some government-backed loans.
Roll Closing Costs Into the Mortgage
If you can’t afford all your closing costs upfront, another option is to see if you can roll them into your home loan, Epps said. This doesn’t actually lower the closing costs, but it does help spread them out over time, which may make them easier to pay. “Keep in mind that you will ultimately pay more in interest and monthly payments because you increase your total loan amount,” Epps said.
