Closing costs are very difficult to determine ahead of time because they’re a collection of different expenses that arise for different reasons. The amount of fees depends on location of the property, the type of mortgage, and the price of your home. You can ballpark closing costs to be between 2% and 5% of the home value. In this article I’ll teach you how to minimize your closing costs and save money.
We’ll focus on the common closing costs in Southern California and discuss how to minimize them. Some of the closing costs here will overlap with those discussed in my previously published article, Out of Pocket Money, because they are interrelated.
Closing Costs Reduction
Below you will find ways to reduce closing costs.
The appraisal fee is non-negotiable. Lenders don’t make any money on your appraisal because this fee is paid directly to an appraisal company. The appraisal fee is usually paid upfront, out of pocket, by the borrower/buyer. In some rare cases, the lender will offer you a free appraisal. This lender’s service is almost always sub-par because they’re probably serving too many customers. In some cases, the lender will offer to pay for it upfront and charge you on the back end (that’s a good deal).
Closing / Escrow Fee
This fee is negotiable. You’re paying it to the title or escrow company for handling your transaction. You can negotiate this fee directly with the title/escrow company. If you’re in a purchase transaction, check your contract to see if you’re able to switch title/escrow companies. You can also try getting quotes from other title/escrow companies and then presenting the best quote to the title/escrow officer handling your transaction, because sometimes they will attempt to win your business by matching the best offer.
Credit Report Fee
The credit report fee is non-negotiable. Most lenders don’t charge the borrower upfront to run their credit and instead charge the borrower at closing. The lender doesn’t make any money on running your credit report and the entire fee goes to the credit reporting company.
The flood determination fee is non-negotiable. This fee is paid to a third party to determine if the property is located in a flood zone. If it is located in a flood zone, a separate flood insurance policy will be required to be paid for buy the borrower.
The home inspection fee is negotiable. We usually only see these fees in purchase transactions. You can shop this fee the same way you would shop lenders. However, the cost of the inspection is not as important as the quality of the report. A good report can uncover major issues, repairs, and deferred maintenance the home may need. You can use this report to negotiate a credit for repairs from the seller. I strongly suggest going with the home inspection company your real estate agent recommends and has had extensive experience with.
HOA Transfer Fee
The Homeowners Association (HOA) Transfer Fee is non-negotiable. This fee is present any transaction involving a homeowners association. This could be for a purchase or a refinances of a condominium or a planned unit development (PUD). The HOA has a right to charge for facilitating real estate transfers, as well as providing documents such as CC&Rs, Bylaws, Budgets, as well as copies of the master insurance policy. Like an appraisal, the borrower is usually paying this fee upfront.
Homeowners’ insurance is mandatory when using a mortgage because the lender always requires insurance coverage. You have the right to shop your insurance services provider and get the best deal for yourself. A good way of getting a deal on insurance is to bundle your auto and home insurance together, so call your insurance broker and get a quote. You may also want to ask your real estate agent for an insurance broker referral, then compare their quote to your broker’s.
Lender’s Policy Title Insurance
The lender’s policy title insurance is non-negotiable. Your lender is requiring for you to pay for this policy because it protects the lender from title issues. The only way to reduce this fee is to shop title companies. In a purchase, you usually have to go with the title company of the seller’s choice. In a refinance, you usually have the flexibility of using any title company you want.
Loan Specific Fees
Some loans, such as VA and FHA, have non-negotiable funding and/or upfront fees. These fees cannot be shopped for and are usually forwarded to a third party by the lender.
The origination fee is negotiable and is lender specific. It covers the lender’s administrative costs. However, reducing this fee is hard work and requires you putting a lot of pressure on the lender. A realistic way of negotiating this fee is to get a better total offer from another lender and use it as leverage for getting the origination fee waved or reduced.
The pest inspection fee is negotiable. It may be required by your lender. You can shop this fee the same way you would shop any other service.
Prepaid interest is non-negotiable. It is technically not a “fee” but rather the interest you will owe to the lender that will accrue between the closing date and the date of your first mortgage payment.
The processing fee is similar to the origination fee we discussed above. The same rules apply.
These fees are non-negotiable. Your local recording office is charging these fees for entering your transaction into the public records.
The underwriting fee is similar to the origination fee, therefore the same rules apply for negotiating it.