Choosing the Best Mortgage for Lower Closing Costs: A Comprehensive Guide

Closing costs are the fees charged to finalize a mortgage loan and transfer homeownership. These costs are paid at closing and typically range from 2% to 5% of the total loan amount. Closing costs include charges by the lender, third-party fees, prepaid expenses, and government fees. Buyers aim to minimize closing costs when taking out a mortgage.

This guide will help you understand closing costs, compare options to lower fees, negotiate for savings, and choose lenders with affordable closing costs.

What Are Mortgage Closing Costs?

Closing costs cover the fees to process, underwrite, and close the mortgage loan. While specific charges vary, common closing costs include:

• Origination fee – A charge by the lender to evaluate your application and fund the loan. Typically 1% of the loan amount.
• Appraisal fee – For the appraisal report to confirm the property’s value. Costs $300-$600 on average.
• Credit report fee – Charged by the lender to pull your credit reports. Usually under $100.
• Title fees – Includes title insurance to cover claims against the property title. Often around $700-$900.
• Recording fees – Charged by local governments to officially record your ownership and mortgage deed. Usually under $100.
• Homeowner’s insurance – Required policy to protect the property. Paid upfront at closing.
• Prepaids – Costs like property taxes and homeowner’s insurance premiums paid in advance.

Closing costs also include third-party fees paid to the real estate attorney, escrow agent, or other professionals facilitating the closing. Shopping lenders and negotiating can help reduce these closing costs.

What Factors Influence Mortgage Closing Costs?

Several key factors determine your total closing costs:

• Loan amount – Generally, the higher the amount borrowed, the higher your closing costs. Fees are based on a percentage of the loan.
• Down payment – A lower down payment usually means higher loan costs, while a 20%+ down payment lowers costs.
• Loan type – FHA and VA loans have higher upfront mortgage insurance fees added to closing costs.
• Credit score – Borrowers with excellent credit tend to get lower rates and costs. Lower credit scores increase closing costs.
• Interest rate – A lower mortgage rate may come with “discount points” paid for a rate reduction added to closing costs.
• Location – Closing costs can vary by state, county, and metro area due to local taxes, fees, and regulations.

Asking your lender for a complete breakdown of estimated closing costs helps reveal areas to target savings.

How to Estimate Your Closing Costs

Mortgage closing costs often take into account various fees and charges, can significantly impact your overall mortgage costs.

Closing costs typically range from 2% to 5% of the loan amount. They encompass fees for various services and processes involved in finalizing your mortgage, such as home inspections, title searches, and origination fees. Let’s break them down: 

• Home inspection: This fee is paid to a professional who assesses the property to identify potential issues or damages.
• Title search: This fee is charged for researching public records to ensure no one else has a claim to the property you’re buying.
• Origination fee: This is what the lender charges for their work in preparing and servicing your mortgage loan.

The exact closing costs can vary depending on your lender and the type of home you’re purchasing. However, you can make a rough estimate based on the average percentages.

The lender’s origination fee is usually the largest closing cost, averaging around 1% of the loan amount.

Title insurance and appraisal fees are common closing costs, each averaging around $1,000. Third-party fees, such as credit report and attorney fees, can add up to $1,000 or more.

Here’s a table to give you an idea: 

Cost	Percentage of Loan Amount
Home Inspection	0.2%
Title Search	0.5%
Origination Fee	0.5% – 1%

By adding up these percentages, you can get a rough estimate of your closing costs as a percentage of your loan amount. For example, if your mortgage loan is $300,000, your estimated closing costs could range from $6,000 to $15,000. On average, closing costs in the United States amount to around $5,000.

Remember! These costs are just estimates and actual costs may vary. Always consult with your lender or a financial advisor for exact numbers.

How to Compare Mortgages Based on Closing Costs

When shopping mortgage lenders, closing costs should be one of your main points of comparison. Here are some tips:

1. Understanding Good Faith Estimates

Early in the application process, lenders must provide a Good Faith Estimate outlining estimated closing costs. Compare these side-by-side.

2. Comparing Loan Estimate Forms

Once you choose a lender, carefully review the Loan Estimate form listing itemized costs. Compare to other lender’s Loan Estimates.

3. Asking Lenders about Potential Fees and Charges

Many fees are negotiable or waivable. Ask lenders what they can do to reduce or eliminate specific closing costs.

4. Considering No-Closing Cost Mortgages

Some lenders offer “no-closing cost” mortgages by rolling fees into the loan amount. Compare long-term costs of this option.

5. Negotiating with Sellers for Lower Closing Costs

Sellers may agree to pay a portion of closing costs through the sales contract. This effectively reduces your costs at closing.

How to Save on Mortgage Closing Costs

Here are some top ways to reduce the closing costs on your mortgage:

1. Shopping Around for the Best Rates and Terms

Obtaining quotes from multiple lenders makes it easier to find affordable closing costs. Leverage lender competition.

2. Requesting a Breakdown of Fees from Your Lender

Review the fee estimates line-by-line and ask about waiving or reducing individual charges.

3. Negotiating Fees with Your Lender or Real Estate Agent

Lenders and real estate agents often negotiate their commissions and fees. Ask for discounts.

4. Opting for a No-Closing Cost Mortgage

The lender covers closing costs by adding them to the mortgage balance. You repay the costs over time.

5. Asking the Seller to Pay Some or All of the Closing Costs

Sellers can agree to a closing cost credit for buyers, typically 3% of the purchase price.

6. Applying for Assistance Programs or Grants

First-time homebuyers may qualify for down payment or closing cost assistance grants.

Which Types of Mortgages Typically Have Lower Closing Costs?

Certain mortgage programs and loan types tend to offer lower overall closing costs:

1. Conventional Loans vs FHA Loans vs VA Loans

Conventional loans usually have lower upfront mortgage insurance fees compared to FHA or VA loans, reducing overall closing costs.

2. Fixed-Rate Mortgages vs Adjustable-Rate Mortgages

The closing costs for a fixed-rate mortgage are typically lower compared to an adjustable-rate mortgage.

3. Jumbo Loans vs Conforming Loans

Non-conforming jumbo loans above the conventional limit can have higher closing costs. Conforming loans have lower costs.

What Lenders Are Known for Low Closing Costs?

Certain lenders are competitive when it comes to low rates and affordable closing costs:

• Quicken Loans – Known for great online tools to compare costs and respectable closing costs.
• LoanDepot – A top lender offering loans with no origination fee to reduce closing costs.
• Veterans United – Offers VA loans with $0 down payment and limited closing costs for military borrowers.
• AimLoan – Focuses on reduced closing costs through discounted lender fees.
• Better.com – An online lender with a price match program to beat competitor closing costs.
• Lenda – Leverages tech to reduce overhead costs and provide low closing cost loans.

How to Avoid Unexpected Increases in Closing Costs

When applying for a mortgage, keep these tips in mind to avoid surprises at closing:

• Lock in your interest rate early to prevent rate-driven fee hikes.
• Review revised Loan Estimates and ask about any new fees that appear.
• Avoid major purchases or changes to your finances before closing.
• Maintain your minimum credit score requirements to prevent higher costs.
• Watch out for prepaid items like property taxes and home insurance premium spikes.
• Clarify who pays for any requested repairs and inspections needed before closing.

How Your Credit Score Can Impact Your Mortgage’s Closing Cost

In most cases, the higher your credit score, the lower your closing costs:

• Borrowers with credit scores above 740 get the best rates and lowest fees. Aim for this tier.
• Scores from 670 to 739 may qualify for decent rates but with slightly higher closing costs.
• Subprime borrowers with scores below 670 can still qualify but will pay the highest mortgage rates and costs.
• A rapid score improvement prior to applying can help you land better approved terms.

Paying down debts, fixing errors on your credit reports, and managing credit wisely helps raise your score to reduce closing costs when you apply for a mortgage.

What Is a Good Faith Estimate and How Does It Relate to Closing Costs?

A Good Faith Estimate is a standard form that was traditionally used in the United States for estimating the closing costs for a mortgage loan. This form was replaced by the ‘Loan Estimate’ in October 2015 as part of the Consumer Financial Protection Bureau’s ‘Know Before You Owe’ mortgage initiative. 

The purpose of the GFE, or the current Loan Estimate, is to provide borrowers with a comprehensive and accurate estimate of all the costs involved in obtaining a mortgage. This includes interest rates, loan terms, and closing costs. 

The closing costs are an integral part of the GFE. They are the costs and fees associated with finalizing your mortgage. These may include: 

• Title insurance fees
• Appraisal fees
• Origination fees
• Prepaid items such as homeowners insurance premiums, property taxes, and interest

Closing costs typically range from 2% to 5% of the loan amount. The GFE or Loan Estimate provides a detailed breakdown of these costs, helping you understand and prepare for them ahead of time. 

Remember, choosing the best mortgage for closing costs means understanding and comparing these costs in your Loan Estimate.

Should You Roll Your Closing Costs into Your Mortgage?

Some lenders offer “no closing cost” mortgages by financing closing costs into the loan amount. Consider the pros and cons:

Pros

• Pay no upfront closing costs at the mortgage closing.
• Incorporated into loan payments over the loan’s term.

Cons

• Increases loan balance and monthly mortgage payments.
• You pay interest on the closing costs over the loan term.
• Closing costs essentially become part of the mortgage debt.
• Can push loan past conforming limits into a jumbo loan.

For most homebuyers, paying closing costs upfront or negotiating discounts is a better long-term option than rolling them into the mortgage. But it can provide flexibility if needed.

Thoroughly weighing mortgage closing costs during lender comparisons helps you identify the most affordable options. Leveraging lender competition, shopping for the best rates and fees, and negotiating can produce significant closing cost savings. With some effort, you can reduce these fees and make your home purchase more budget-friendly.

Frequently Asked Questions

Can I shop around for better closing cost rates?

Yes, shopping around is one of the most effective ways to get lower closing costs on your mortgage. It’s recommended you get mortgage quotes from 3-5 different lenders so you can compare their rates and estimated closing costs side-by-side. Locking in the lender with the most affordable overall fees and charges for your situation will help you save money at closing time.

Are there any government programs that offer assistance with closing costs?

Some government and nonprofit programs provide down payment and closing cost assistance, including:

• FHA loans allow gifts from family members or nonprofits to be used for closing costs.
• VA loans permit the seller or lender to pay closing costs as part of the transaction.
• USDA rural housing loans offer a subsidy grant equal to 3% of the purchase price to assist with upfront costs.
• State and local housing agencies may have grant programs for closing costs if you meet certain income limits as a first-time homebuyer. Reach out to them to inquire.

Are closing costs tax deductible?

In most cases, closing costs are not tax deductible. However, you may be able to deduct mortgage interest, property taxes, and some points paid to buy down your interest rate. Make sure to save documentation of these mortgage-related payments. Consult a tax professional to understand which specific costs may qualify as write-offs on your tax return.

Can I get a mortgage with no closing costs?

It is possible to get a no closing cost mortgage, where the lender covers all or most of the usual closing costs by rolling them into the total loan amount. You then repay the closing costs over time through your monthly mortgage payments at the same interest rate. Lenders sometimes run promotions where they offer these no closing cost loans.

Are closing costs negotiable?

Many of the closing costs from third-party providers are negotiable to some extent. Your loan officer may be able to negotiate with the title company, escrow officer, and other third parties to lower some of their standard fees. You can also negotiate lender fees, and ask for discounts on origination points, application fees, or other charges from the lender directly. It never hurts to politely ask!