6 Ways You Can Reduce Your Home Mortgage Costs

The closing costs of a home loan include appraisal fees, inspection fees, broker fees, title fees, administrative fees, and others. 

Closing costs can account for a significant portion of the cost of the loan. When looking for the lowest mortgage rates, ask lenders what closing costs will be and what the fees will amount to. 

There are several things you can do on your own to keep closing costs low, too. The following six tips will help you secure a mortgage with the best rates and lowest fees.

Check your credit score.

This goes without saying. If you have poor credit, lenders will be less willing to help you out with closing costs. Therfore, take steps to repair your credit. This will help you get a loan with better rates and also helps to establish you as someone whose finances are in order.

Don't add the closing costs into the loan itself.

It's true that carrying the closing costs out over the balance of the loan will eliminate all immediate expenses. However, over the course of the mortgage, you'll end up paying more. You may even end up paying tens of thousands of dollars more on your closing costs if you add them to the balance of the mortgage. 

If your goal is to save money, find a way to pay for these expenses up front.

If you're refinancing, work with your current lender.

This is only applicable if you're refinancing rather than a first time home buyer. He or she will likely cut you a deal in order to prevent you from going to a competitor.

Negotiate with your lender.

Try to talk your way out of high closing costs. Don't be afraid to tell your lender that you're checking out other lenders, too.

Ask for a free month.

Your lender may a waive a mortgage payment at the start of the loan term. Put that month's payment toward the closing costs instead. Whether your lender will agree to this or not is dependent upon your personal situation and the timing of the loan, but many homeowners have negotiated such deals for themselves and have saved a significant amount of money.

Pay points to buy down interest.

Mortgage points are costs that need to be paid to a lender in order to receive mortgage financing under specified terms. A point is a percentage of the loan amount (one point = one percent of the loan). One point on a $100,000 loan would be $1,000. Discount points are fees that are used to lower the interest rate on a mortgage loan (you are discounting the interest rate by paying some of this interest up-front). 

Lenders may express other loan-related fees in terms of points. Some lenders may express their costs in terms of basis points (hundredths of a percent). 100 basis points = 1 point (or 1 percent of the loan amount).

Should I pay discount points to lower my interest rate?

If you plan on staying in the property for a few years, paying points to lower the loan's interest rate can be a way to lower your monthly loan payment.

If you only plan to stay in the property for a year or two, your monthly savings may not be enough to recoup the cost of the discount points that you paid up-front. Ask your lender how long it would take for your monthly savings to recover the costs of the discount points.

Example: A lender gives Tom Wellington a choice of an $85,000 loan at 7 percent with two points ($1,700 paid at closing) or at 8 percent with no points. Which is better?

It depends on what Tom wants to accomplish. While the difference between the rates is just $58.19 per month principal and interest, it would take more than 29 months to retrieve the $1,700 ($1,700 divided by the monthly payment savings of $58.19). 

So paying points only makes sense if Tom is planning to hold the property for at least 30 months.

Paying points at settlement also means that the borrower has lost the use of that money, plus any possible interest or investment potential.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.