How much do you need to save for closing costs?

This is the final installment in our 5-part first-time house buyer’s guide. Just joining in? Check out Part 1.

If you’re planning to buy a home, you’re probably already saving money for the down payment—the beginning of the whole home buying adventure. But have you also thought about saving for the end of the process, the closing costs?

If you answered “No,” you’re not alone. Many home buyers can be surprised by closing fees—and not in a “Yay, let’s celebrate!” kind of way. Buyers are often caught off guard about these costs and how expensive they can be.

However, a little advance planning can help a lot. Knowing exactly what fees are required at closing can help you prepare for the big moment. And knowing when, where and how to save on closing costs could actually help lower the total amount you’ll pay.

What are closing costs?

Closing costs are all the fees you’ll pay at your closing meeting, which is the last step in the home buying process. Once you close your loan, those long-awaited house keys will officially be yours.

Closing costs might seem like a confusing jumble of dollar signs at first. The good news is there are ways to save money on them. Prepare to dig in and do some research, but a little bit of extra work could save you thousands of dollars.

How much are closing costs, on average?

Buyers can expect to pay between 2 and 5% of a home’s purchase price in closing costs.¹ On a $200,000 house, that amounts to $4,000-$10,000. Gulp. Yes, you read that right. You’ll pay closing costs on top of your 5-10% down payment. So on a $200,000 house, you could hand over a grand total of $14,000 to $30,000 (down payment and closing costs) before you get your house keys.

But don’t let the numbers scare you off. There are definitely ways to cut closing costs. Whatever your final savings total ends up being, you’ll need to keep this money easily accessible as you get ready for closing. Consider depositing closing funds in an online savings account or money market account. You can easily transfer the money to your checking account right before closing. You’ll then wire the funds or write a check to your escrow company.

Are there ways to save money on closing costs? (Hint: Yep!)

Closing fees are pretty standard among all lenders. Some fees aren’t really negotiable, but others definitely are. Start any cost-savings quest by reviewing your estimate of closing costs, called a Good Faith Estimate (GFE), at the beginning of your mortgage-application process. All lenders are required to give you a GFE, so you can easily compare closing costs from different lenders to figure out the best deal for you.

You’ll get the final closing cost total (your Closing Disclosure) at least 3 business days before closing. Even though you won’t have a ton of time before you close, go over your disclosure with a fine-tooth comb. If you have questions or see mistakes, get in touch with your lender right away, so you don’t overpay or delay your closing date.

Exactly how can you cut closing costs?

First of all, what you as the buyer pay at closing depends on your mortgage type and your lender’s requirements. However, the following fees are fairly typical. Prices for each item can vary, depending on where you live.

Lender fees. These are charges for processing your loan:

• Application fee
• Origination fee
• Credit report charges
• Wire transfer costs
• Property taxes

How to save on lender fees:

• Ask for discounts. Your lender may be willing to reduce or even waive your application fee, if you ask.
• Don’t pay twice. Some application fees include costs for things like property appraisal or credit reporting. Get a list of what’s included in your application fee, so you don’t get charged separately for the same service.
• Negotiate with the seller. Your real estate agent may persuade the seller to pay some or all of your closing costs. This may be particularly true if the seller is very motivated to get their house sold. (It’s actually not only you who pays closing costs—sellers pay their own fees as well.)
   

Mortgage-related fees. Common ones include:

• Discount points
• Private mortgage insurance (PMI)
• Other fees, including Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) or U.S. Department of Veterans Affairs (VA) charges if you take out a government-guaranteed mortgage

How to save on mortgage fees: Your main option is to consider paying for discount points. Points are simply loan interest charges you can pay upfront instead of over the life of your mortgage. Each point equals 1% of your loan amount. Paying for this advance interest will actually increase your closing fees. However, you’ll pay less on your ongoing, monthly mortgage payment for the life of your loan. So discount points may be worth considering.

 

Fees to outside companies and agencies. These can include:

• Property appraisal charges
• Inspection costs
• Survey fees
• Attorney, escrow and closing fees

How to save on outside agency fees: Comparison shopping can help. Get multiple bids from as many of the different professionals as you can—inspectors, surveyors, attorneys and title insurance agents. Your top picks may be willing to negotiate their charges if you can show that their competitors’ prices are lower.

 

Property ownership fees. The biggies here include:

• Homeowners insurance
• Title searches and title insurance fees
• Transfer taxes (usually the seller’s responsibility)
• Recording fees

How to save on property ownership fees:

• Bundle your insurance policies. You may earn lower rates if you buy both home and car insurance from the same company, according to the Insurance Information Institute (III).
• Shop around for title insurance. This insurance helps insure your title (the document that gives you ownership of your home). Title insurance also protects your lender in case someone tries to file a debt against the property you’re buying. You can buy title insurance at closing to protect yourself. You may save hundreds of dollars on this one fee (which totals around 1% of your house’s purchase price, or about $2,000 on a $200,000 home) by getting price bids from different companies.
   

So how do I pay for closing costs?

Once you’ve negotiated the best deal possible on your closing costs, it’s time to pony up your money. The nitty-gritty is that buyers pay their closing costs by check or wire transfer. Your mortgage loan officer or the escrow company handling your closing will advise you.

In some cases, you may also be able to add your closing costs to your mortgage loan amount.² In that case, you may not owe any money at the closing table. However, remember that rolling closing costs into your loan means a bigger mortgage, a higher monthly mortgage payment and more interest over the life of your loan. That’s gonna leave you less money to save for other financial priorities.

It’s no surprise that earmarking money for your closing costs probably isn’t on anyone’s “Top 10 Fun Parts of Home Buying” list. However, with a little research and some artful bargaining, your closing fees could end up being much less expensive than you thought. That means more money left in your bank account for that new family room sectional couch and TV.

Looking for more information about the home-buying process? Start at the beginning of our 5-part series about how buying a home impacts your finances.