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A down payment isn’t the only expense you need to consider when buying a house — you’ll also have to budget for closing costs, which could range anywhere from 2% to 5% of your total loan amount. And with the median home sales price well over $400,000, this means you could end up shelling out over $20,000 in closing costs alone. Once you factor in the down payment, moving costs, and new furniture, homeownership can start to feel out of reach.
The good news is that there are ways to reduce closing costs.
Dig deeper: How much money do I need to buy a house?
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Closing costs are the fees you pay to the service providers that are part of your home-buying process, and they typically run from 2% to 5% of your total loan amount. So, if you take out a $500,000 mortgage, expect to pay somewhere between $10,000 and $25,000 in closing costs.
Here are some of the most common closing costs:
This is not an exhaustive list. The exact fees and dollar amount you’ll be expected to pay will depend on your mortgage lender and what type of mortgage you get.
Learn more: Cash to close — what you’ll owe on closing day
Closing costs are a significant expense that can make homeownership feel unaffordable and unattainable. Here are a few strategies to lower these costs.
Lender credits are discounts that some mortgage lenders offer to help reduce your closing costs. In exchange, you’ll pay a higher interest rate over the life of your loan. The more credits you use, the higher your mortgage interest rate will be.
Lender credits could make financial sense if you’re short on cash or plan to sell the home within a few years. The higher interest rate might not be a major issue if you don’t plan to stay in the home long term. Make sure to crunch the numbers and see if the initial savings outweigh the added interest payments over the life of your loan.
If you’re in the final stretch of buying your dream home but are overwhelmed by the closing costs, look into closing cost assistance programs. Closing cost assistance can come in many different forms, including grants, forgivable loans, and deferred loans. Many state housing finance agencies (HFAs) offer closing cost assistance programs to low-to-moderate-income home buyers in their states.
Sometimes these programs are listed online as down payment assistance, but the funds can often be used for either down payments or closing costs. Contact your HFA to get more details about the participating lenders and see if you meet their eligibility requirements.
Taking out a mortgage is one of the biggest financial decisions of your life, so it pays to shop around for things like a mortgage lender, loan type, and third-party services. Start by applying for preapproval with three or four lenders to see what terms each offers.
Then, you can compare the closing costs listed in your Loan Estimates and see how they stack up against one another. By law, lenders are required to send you a Loan Estimate within three business days after you apply for a mortgage. This form breaks down the estimated costs, structure, interest rate, and other details of your loan terms.
On page two of your Loan Estimate, you’ll find a section labeled “Services You Can Shop For,” which lists fees for things like the property survey, pest inspection, and title search. These are areas where you can potentially save by shopping for third-party vendors that offer better rates. While “Services You Cannot Shop For” are chosen by the lender, you’ll still want to compare the costs across different lenders to find the best deal.
Read more: The best mortgage lenders for first-time home buyers
After reviewing your Loan Estimates, try negotiating with lenders to reduce or waive some of your closing costs. The closing costs you may be able to negotiate include the application fee, origination fee, underwriting fee, rate lock fee, home insurance premium, and title insurance.
If you’re still choosing between mortgage lenders at this point, negotiating can help you determine which will offer the best deal on closing costs. If you have already chosen a lender, you should still negotiate — there’s nothing to lose.
Dig deeper: Mortgage lender fees — How they differ from other closing costs
Usually, home buyers pay for most of the closing costs. However, in a strong buyer’s market where there are fewer buyers than houses for sale, you may have success negotiating with motivated sellers and asking them to take on some of your closing costs. Your real estate agent can help you come up with a negotiating strategy.
A no-closing-cost mortgage doesn’t eliminate closing costs entirely. Instead, it rolls the closing costs that you don’t pay up-front into the loan, which increases the amount of interest you pay over the life of your mortgage. Still, no-closing cost mortgages can be an option worth considering if you’re short on cash or want to put money toward making a larger down payment.
Prepaid interest, also called per-diem interest, is one of the many closing costs you’ll have to pay. It’s the interest that accrues from the closing date until the day your first mortgage payment is due (usually on the first day of each month).
If you schedule your closing date near the end of the month, you’ll owe less in prepaid interest at closing than if you were to close mid-month.
Read more: What to expect when closing on a house
While rolling your closing costs into a mortgage could be a good way to save on out-of-pocket cash, it’ll cost you more in the long run since you have to pay interest on that debt.
Most lenders and title companies will not let you put closing costs on a credit card. They typically require you to wire the money or use a cashier’s check.
If you don’t have money to pay the closing costs, you won’t be able to close on the home, and any earnest money you put up will be forfeited.
This article was edited by Laura Grace Tarpley.