How to Reduce Closing Costs When Buying a Home

The cost of a new home can be astronomical, but fortunately, it’s usually spread out over the term of your mortgage.

However, when they think about the cost of buying a home, many people don’t think about closing costs. These expenses can be many thousands of dollars, and you often have to pay them up front. Learn how to reduce closing costs when buying a home.

What are closing costs?

“Closing costs” is a catch-all term for the various fees you’ll owe when you purchase a home. These are some of the most common closing costs:

• Origination Fee: Covers the administrative cost of creating the loan
• Appraisal Fee: Pays for a professional to assess the home’s value
• Discount Points: Optional points you can purchase to lower your interest rate
• Credit Report Fee: Charged by lenders when they review your credit report
• Inspection Fee: Pays for a professional to identify structural issues or defects
• Recording Fee: Covers the cost of legally recording the new deed
• Title Search: Verifies that the home has no existing liens or title defects
• Title Insurance: Protects the owner and lender from future claims against the home title
• Prepaid Interest: Mortgage interest that accrues from your closing date until your first payment
• Escrow Fee: Paid to an escrow company for facilitating the closing on your loan
• Property Taxes: 6-12 months of property taxes that may need to be paid at closing
• Mortgage Insurance: Protects the lender if you can’t make mortgage payments

Homeowners’ insurance is also a significant closing cost for most new homeowners. It’s not unusual for homeowners’ insurance companies to require buyers to pay a full year of homeowners’ insurance premiums at closing.

How much are closing costs typically?

Closing costs are usually about 2% to 6% of the home’s total value. That means for a $400,000 home, your closing costs could be anywhere from $8,000 to $24,000.

Most of the time, buyers are responsible for closing costs. They are generally due up front, but some lenders may allow you to roll some of your closing costs into the loan.

Before you decide to use this option, remember that if you roll closing costs into the mortgage, you’ll pay interest on that increased loan amount over time. In many cases, rolling closing costs into a loan ultimately costs more than just paying them up front.

How to reduce closing costs when buying a home

Before you buy a home, consider several ways to lower closing costs.

Ask the seller for concessions

The more motivated a seller is, the more likely they are to offer concessions. Concessions are contributions the seller makes to the buyer’s upfront costs. Even if a seller isn’t willing to make concessions directly, they may help you free up cash by making necessary repairs to the home.

Shop around for lenders

Many people suggest comparing lenders when you’re looking for a low mortgage interest rate. However, comparing ahead of time is also one of the best ways to lower closing costs.

Negotiate lender fees

In most cases, mortgage lender fees are more negotiable than many people realize. These are a few examples:

• Underwriting fees
• Application fees
• Origination fees
• Rate-lock fees

It’s worth talking to your lender about lowering these fees. Remember that you can continue to negotiate up until you sign your mortgage agreement.

Look into no-closing-cost mortgages

Some lenders offer mortgages without closing costs. These mortgages often come with higher interest rates, larger total balances, or both. However, if you’re cash-strapped or could benefit from keeping your money liquid, this may be one of the better ways to lower closing costs.

Close at the end of the month

When you close on your home, you generally owe a prorated amount for property taxes, interest, and insurance for each remaining day of the month. The closer your closing is to the end of the month, the lower these costs are likely to be.

Skip the extras you don't need

You can’t skip most closing costs. However, if you’re trying to keep closing costs low, there are a few things you may be able to avoid. Extra home warranties are typically optional, and so are mortgage points that you can purchase to lower your interest rate.

Use first-time buyer programs or grants

Depending on where you live, your state or locality might offer loans or grants to help first-time homebuyers cover the upfront costs of buying a home (including down payments and closing costs).

Improve your credit score before applying

When deciding how to reduce closing costs when buying a home, some of the most important steps take place before you make your purchase. Not all closing costs are dependent on your credit score, but boosting your score before you buy could save you hundreds or even thousands of dollars.

Need help boosting your credit score before you buy a house?

For most people, buying a home is the largest purchase they’ll make in their lifetimes. Taking the time to improve your credit score now could save you thousands of dollars over the life of your mortgage.

If you’re not sure how to take your credit to the next level, Kikoff is here to help. We’re a credit-builder app for everyone. We offer access to credit lines, rent reporting, and other tools to help you increase your credit score or establish credit for the first time.

Joining is free, and there’s no credit check. Get started with us today!