Reducing Mortgage Closing Costs

Mortgage closing costs add quite a bit to the process of buying a house. Most of the time, the closing costs on a loan can add up to thousands of dollars. Many people accept closing costs as face value because they think that there is nothing that they can do about them and pay them without negotiations. However, many closings costs are negotiable. Here are a few tips to determine how to best shop for closing costs:

Shop Around

Every lender charges different closing costs. Closing costs are made up of several different fees. Different lenders call them by different names. Each lender will also have their standard fee for every different type of service. Lenders price loans depending on overhead, market conditions and income potential. Since different lenders have different amounts for closing costs, you should shop around for the best deal. You want to find the lender that charges the least for their closing costs. 

When you talk to a bank about a mortgage, they are required by law to give you a written estimate of all the closing costs that will be associated with the loan. This is referred to as a "good faith estimate." They will break it down into individual categories for you so that you can see exactly what you will be paying for. When you shop around for a loan, you will be able to get one of these for each lender that you work with. These good faith estimates make it very easy to compare lender to lender in the area of closing costs.

Negotiate

Once you have the collection of good faith estimates, you need to use them to your advantage. Narrow your options down to two or three lenders that you would prefer to work with. Take these estimates and use them as negotiation tools. Take the lowest closing cost offer that you received and ask the lender to match it, or beat it. Tell them that you want to do business with them, but you feel like their closing costs are a little high compared to the rest of the market.

If a lender wants your business badly enough, they will eliminate some of the closing costs for you on the spot. If they do not give you what you want, do not feel bad about walking out and going to see the next lender on your list. Using these good faith estimates is a great way to gain leverage over individual lenders and find your best offer.

Remove Points

One area that may be negotiable is the points that you are asked to pay. A point is equal to 1% of the mortgage amount. A point basically buys down your interest rate. Therefore, if you are willing to pay a slightly higher interest rate, removing the points from the closing costs will save you some money. When you shop around, be sure to always use the same frame of reference, with respect to rate, so that you can get an accurate picture of costs.

For example, one lender may offer a 6 % rate with 0 points and another will offer the same rate, with 1 point. The lender may give you a good faith estimate with 0 points at a 6.5 % rate and show lower fees, but the cost would still be greater.