How to reduce closing costs: 7 negotiation strategies

You’ve found your dream home, settled on a price with the seller and secured a tentative commitment from the lender on a mortgage. Yet, as you approach the closing, you’re concerned about mounting expenses and those pesky closing costs.

The amount a borrower pays in closing costs varies depending on a number of factors, most importantly the home’s price and which state you’re located in. These fees, charged by the lender and other vendors, can add up quickly. As a general rule, you can expect closing costs to cost you about 2 percent to 4 percent of the total home price. Nationwide, closing costs on a single-family property purchase in 2021 averaged $6,905, including taxes, according to data from CoreLogic’s ClosingCorp.

The good news? Many closing costs are negotiable. If you’re looking for ways to make some of these costs go away — or, at least, to reduce the damage — the answer is to negotiate. Here are 7 negotiating strategies to help lower your closing costs, whether you’re buying a home or refinancing.

1. Comparison shop from your loan estimate

The lender is required to give you a loan estimate form within three days of completing a mortgage application. This form includes an itemized list of costs, including your loan amount, interest rate and monthly payments. But there’s nothing keeping the lender from giving it to you sooner, so ask for it.

On page two of the form, you’ll see a section called “Services you can shop for.” These typically include a pest inspection, a survey and fees for the title search, settlement agent and insurance binder. The vendors listed on the form might be your lender’s preferred vendors, but you’re not required to work with them, and your lender is also required to offer alternatives. You can also shop around for lower-priced vendors for different services on your own. If you choose a lender-provided vendor, its pricing isn’t allowed to change by more than 10 percent from the original quote, but if an independently selected vendor changes its pricing before closing, you’ll be on the hook for any increase (no matter how large).

Additionally, if you’re buying a home, note that the seller or seller’s real estate agent might be the ones who chose the title and escrow provider. If you want to get new vendors for these, you’ll need to negotiate the purchase agreement with the seller, not with your mortgage lender.

2. Don’t overlook lender fees

Many lenders charge a variety of loan-related costs, including fees for origination and underwriting. You might not be able to get out of them altogether, but see if your lender is willing to knock them down a bit. It’s better to ask for a discount and get denied than to not ask at all.

It’s also a good idea to compare offers from other lenders. If you can get an estimate before you submit your application, try to get different loan estimate forms from different lenders to compare. Pricing changes frequently, so for the most accurate basis of comparison, try to get these estimates on the same day and at the same time.

3. Understand what the seller pays for

Who pays for which closing costs? While the buyer pays some, the seller is typically obligated to pay others, including the biggest-ticket item: the real estate agent commissions. You can ask your seller to chip in to cover some of your portion, which would be reflected as “seller credits” on the loan estimate form. This strategy might not work in a seller’s market, where sellers have much more leverage, but it’s common to ask. In fact, a Redfin study from early 2023 found that more than 45 percent of home sellers offered some form of concessions to their buyers.

4. Consider a no-closing-cost option

Some lenders offer no-closing-cost loan options, usually in exchange for a higher interest rate. While this saves you from having to pay the money upfront at the closing, it ultimately costs you more in the long run because your lender is effectively absorbing these costs while you pay a higher rate.

5. Look for grants and other help

Many cities, counties and states have down payment and closing cost assistance programs for qualified homebuyers, especially first-time homebuyers. If you are eligible, these can help you cover some of the costs associated with closing. Explore your options with this guide to homebuyer programs by state, and ask your real estate agent if they know of any programs that might work for you.

6. Try to close at the end of the month

If you are able to schedule your closing for the end of the month, you can reduce your cash outlay at closing by reducing the number of days to which the per diem interest is applied before your first mortgage payment is due (usually on the first of each month).

To see how much you’d save, just multiply your loan amount (the total amount financed) by your interest rate — for instance, if your rate is 6 percent, multiply by 0.06 — to get your annual interest expense. Then, divide that figure by 360 to get your daily interest charge (most lenders calculate interest using 360 days, not 365). Next, multiply that figure by the number of days left in the month plus the first day of the following month. If your loan is funded toward the end of the month, this figure would be much lower than if you were closing mid-month.

7. Ask about discounts and rebates

Did you ever go to buy a car, or even an item of clothing or piece of furniture, and find out about rebates you didn’t know existed? The same may be true with mortgage loans, as some lenders offer incentives to attract borrowers. These rebates can knock down various costs by a few hundred dollars — easy money for the time it takes you to ask. You never know what you may find if you don’t ask.

Bottom line

If you’re prepared for mortgage closing costs well before they hit, you won’t be surprised by the final figure. Don’t settle for the first thing your lender quotes you, and don’t hesitate to shop around to compare costs from other lenders early on in the process. You can also try to negotiate some of these costs, potentially get the seller to help with others and look into state or local programs for more closing cost assistance.