It might seem like your bank account will have a hole in it by the time you’re done buying a house. After all, you’re paying hundreds of thousands of dollars for your new home, and you’ll be paying hundreds of thousands of dollars worth of interest over the life of your 30-year or 15-year fixed-rate mortgage loan.
Find out now: What will my closing costs be?
Then there are the closing costs: the fees you pay to finalize your mortgage loan. These fees, too, can add up. In its 2012 survey of closing costs, Bankrate found that it costs an average of $3,754 to close on a $200,000 mortgage loan in the United States.
Those fees can jump dramatically depending on where you live. The Bankrate survey found that Missouri home buyers pay an average of $3,006 in closing costs, lowest in the United States. In New York, however, buyers pay an average of $5,435 to close a mortgage loan — highest in the country. The Federal Reserve Board estimates that closing costs generally average 3-6% of the final price of your home.
The good news? You can reduce your closing costs; it just takes a willingness to shop around and negotiate. And really, you’re bound to be good at both of those things if you’ve just made an offer on a home.
You wouldn’t buy a car without checking out models at several dealers, right? In fact, you probably don’t even buy new clothes without considering at least a few options.
The same should be true with mortgage lenders: You should shop around with several lenders before taking out a mortgage loan with any one of them.
When you’re interviewing potential lenders, be sure to ask how much they typically charge in closing fees. Ask, too, for a list of the fees, including those going to third parties such as title companies and real estate attorneys.
If lenders aren’t willing to share this information with you, move on. There are plenty of lenders out there, and you might be surprised at the varying fees that lenders charge. The best way to reduce your closing costs is to find those lenders that charge the lowest amount up front.
As SmartMoney reports, closing fees paid to third parties such as credit companies and appraisal companies usually aren’t negotiable. But the origination fees that mortgage lenders themselves charge can vary dramatically.
Some lenders might charge you $100 for the preparation of closing documents, whereas others might skip this fee entirely. One might charge you $1,000 as an origination fee, which is meant to cover most of the costs lenders incur when originating your loan. Another lender will charge far less; still others might advertise that they don’t charge any origination fees at all.
Title insurance is another area in which you can save a significant amount of money. You’ll need title insurance when taking out a mortgage loan, but you don’t need to work with the title insurance company recommended by your mortgage lender or real estate agent. Do some research, and you could find a reputable title agency that will perform your title work for hundreds less.
After the various lenders have given you an estimate of their fees, it’s time to negotiate. Forget the third-party fees and focus on such items as the application fee, doc-prep fee or origination fee. If these seem too high to you, ask lenders if they’ll lower or drop them.
Under federal law, mortgage lenders must provide borrowers with a loan estimate detailing estimated closing costs within three working days of approving a loan application.
The arrival of your loan estimate provides you with a last chance to negotiate your closing fees, especially if these fees are higher than what you were originally quoted. Remember that the costs listed on your loan estimate are only, as the name suggests, estimates. It is not unusual for some of the final costs to be slightly higher than the fees originally quoted to you. But if the costs seem exorbitant, it’s time to negotiate for lower fees. Be blunt: Tell your lender that the fees seem too high.
Remember, you can walk away from your mortgage loan at any time before closing. If a mortgage lender isn’t cooperating with you in working to lower its fees, then it might be time to make a change. Applying for a new loan can be a hassle, but it might also save you hundreds of dollars in closing costs.