How Home Buyers Can Lower Closing Costs

Tips on how home buyers can ease the sticker shock of closing costs, which vary widely across the country.

Chris Gash
Anya Martin

It’s closing time: Last call for every entity with even a small role in a home sale to collect their fees.

Home buyers—eager to get the keys to their new place—must first cover myriad costs, including agent commissions, attorney fees, lender fees, mortgage insurance, a title search, recording fees, real-estate taxes, survey costs and an appraisal (sometimes two on a jumbo loan).

Closing costs can vary depending on which lender is used, what state you live in, the price of the home and even the day of the month the closing takes place. Jumbo-loan borrowers—where amounts exceed $417,000 in most places and $625,500 in high-cost areas—often face the steepest closing costs because many fees are calculated using a percentage of the loan amount. But a little research and comparison shopping can help buyers reduce these out-of-pocket costs.

Borrowers can get a sense of what they will owe in the good-faith estimate document, which federal law requires lenders to provide within three days of the loan application. Lenders cannot change their own origination fees, but they are given a 10% leeway in estimating third-party charges, such as appraisal, survey, inspection and title services, says Peggy Lawlor, a mortgage-strategy executive with Bank of America .

The three states with the highest average closing costs are Texas ($3,046), Alaska ($2,897) and New York ($2,892), according to a 2014 survey of lenders based on a hypothetical $200,000 mortgage. Nevada had the lowest average closing costs ($2,265), the survey found. The final charges can be much steeper because some of the highest third-party costs, including taxes, weren’t included in the survey.

Differences vary not just by state but by individual localities, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. New York City, neighboring Westchester County and the Hamptons on Long Island have some of the highest transfer taxes, also called conveyance taxes, in the country.

In San Francisco, transfer taxes are graduated with a rate of $3.40 for each $500 portion of a purchase price between $250,000 to $1 million, says Mathew Carson, a broker with San Francisco-based First Capital Group. The rate jumps to $3.75 for purchase prices from $1 million to $5 million. In nearby Oakland, home buyers pay a county tax of $1.10 and a city tax of $15 per $1,000 of the home’s purchase price.

Some geographic areas also have different expectations as to whether a buyer or seller pays certain fees. In New York City, a condo buyer will typically pay conveyance taxes, but sellers pick those up for co-op purchases, as well as for single-family homes in Westchester County, Mr. Grabel says.

Title insurance also can vary widely across the U.S.—and even by type of home, says John Walsh, president of Milford, Conn.-based Total Mortgage, which lends in 33 states.

In New York City, Westchester County or the Hamptons, a $1 million condo may cost a borrower $5,900 in title insurance and recording fees, but co-ops may have closing fees as low as $500 because they don’t require title or mortgage insurance, Mr. Grabel says.

The day of the month when the mortgage closes can also affect costs, Mr. Walsh says. “If you close on Nov. 5, you have to pay the per diem interest from the 5th to the 30th, but if you close on Nov. 28, it’s only three days,” he adds.

Borrowers can also reduce out-of-pocket expenditures by wrapping the closing costs into the loan, but lenders will charge a slightly higher interest rate, Ms. Lawlor says. When considering that option, borrowers should balance how much cash they can bring to the closing table versus how long they plan to stay in the home, she adds

More tips that may help lower closing costs:

• Shop around. Apply with more than one lender to compare origination fees quoted in good-faith estimates, says Greg McBride, chief financial analyst for “Be prepared to comparison shop and to negotiate to get the best deal,” he says.

• Relationship discounts. Lenders may offer lower origination fees for their customers, Ms. Lawlor says. For example, Bank of America just rolled out a “Preferred Rewards” program that offers up to $600 in reduced rates depending on the dollar amount of a customer’s deposits.

• Closing attorney. Many borrowers stick with a lender-appointed attorney to represent them at the closing, but they are not required to do so and can hire their own, Ms. Lawlor says.

• Title insurance. Some states dictate the rate that title insurance providers charge, but not all, Mr. McBride says.

Corrections & Amplifications

In a previous version of this article inaccurately paraphrased Mr. McBride’s comment to say that some states require a borrower to use a lender-selected title insurance provider, but not all states do.


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