How to Pay Closing Costs: 4 Tips

Buying a home is a multi-step process — from beginning the search on sites like Zillow or Redfin to claiming the keys and finally moving in. But before you get settled into your new abode, you’ll have to pay a handful of assorted fees known as closing costs. In this article, we’ll examine these fees and explore some of the best ways to pay closing costs. 

Closing 101: An Introduction to Closing Costs

Closing costs tend to raise questions for both buyers and sellers. What are closing costs? When are closing costs due? Let’s embark on a quick closing cost crash course to answer these questions. 

Closing costs are an umbrella term for the numerous fees that add up when completing a real estate transaction. What do closing costs include? Everything from real estate appraisal fees to title search fees and loan origination fees falls under the broad blanket of “closing costs.” In short, they can be chalked up as “the cost of doing business.”  

Especially when compared to the price of purchasing a home, most closing costs appear to be on the smaller side. However, as the list of fees continues to grow, this price can quickly swell in size: total closing costs are generally between 3 and 6 percent of the home’s value.¹ Many of these fees are due on closing day, but some will be handled ahead of time. It’s also worth noting that a handful of these costs (like property taxes and mortgage interest costs) are applied toward future expenses. 

Why Closing Costs Matter

If you’re in the process of paying hundreds of thousands of dollars for a new home, no one can fault you for wondering why closing costs are necessary. But while we can’t argue with the fact that closing costs can be a pain, the truth is they serve a useful purpose. For one — they round out your purchase, ensuring that all administrative and legal tasks are handled promptly and professionally. Something like a title search, for example (only about a $100 fee), can spell the difference between buying a home that is technically owned by someone else and purchasing one free and clear. 

Each line item on your list of closing costs clearly demonstrates intent, and it’s crucial that you ensure these costs are covered come closing day. Now that we understand the importance of closing costs, let’s look at some tips to help you pay for them and manage your homebuying expenses. 

Estimate Your Closing Costs

Closing costs can do one of two things. They can catch you completely off-guard, or they can be easily anticipated — and dealt with handily. To ensure your experience is closer to the latter, you’ll want to estimate your closing costs. There are a few simple ways to do this: 

Reference National Averages

One of the best ways to figure out how much your closing costs will be is to look at what others are paying. Sites like Bankrate offer overviews of average closing costs for every state, giving you an idea of what you’ll owe based on what real estate market you’re in. 

Crunch the Numbers

Considering the average range for closing costs is between 3 and 6 percent of a home’s total value, you can estimate your own closing costs just by doing some quick math. Note, however, that this leaves you with a broad range—if you’re hoping to better anticipate your closing costs, you may want to use a more precise method.  

Ask Your Lender

Looking for the best closing costs estimate? Talk to your lender — they’re the only ones who will be able to give you a precise breakdown of your total costs. In your loan estimate, which mortgage lenders are required to provide you, you’ll find an accurate overview of your closing costs. Granted, this information generally comes once you’ve already decided on a home and have begun the purchasing process.²

Keep Your Closing Costs Low: Strategies for Reducing Closing Costs

There’s a reason why the average range for closing costs is so broad: Some homebuyers are taking advantage of savings opportunities, while others aren’t. To keep your closing costs as low as possible, consider these strategies: 

• Shop Around: You likely comparison-shopped different lenders to get the best mortgage rate — why not do the same to minimize your closing costs? Shopping around can be one of the best ways to lower your closing costs. But rather than looking at different lenders, take a closer look at the recommended service providers listed in your loan estimate. The providers suggested by your mortgage lender won’t always be the most affordable option, so look around to see if there’s a better deal elsewhere. 

• Negotiate: Another way to reduce your closing costs is to negotiate whenever possible. Let’s say you find a better deal with a different title search vendor. You could go with them, or you could take their quote back to your mortgage lender’s choice vendor and see if you can lower the price even lower. 

But negotiating isn’t just for these vendors—you might be able to bargain with the home’s seller to lower your closing costs as part of the deal. Sellers already pay closing costs, but if the deal's life is hanging in the balance, you may be able to shift even more of the responsibility toward them, thus lowering your overall expenses.

• Time Your Closing Right: Some of your closing costs, like your mortgage interest, will be calculated depending on what day of the month it is. The farther you are from the end of the monthly billing cycle, the more interest you’ll have to pay. This is known as per diem interest. 

Your per diem interest can be calculated by multiplying your mortgage by your interest rate — and then dividing that figure by 365. So, if your mortgage loan amount is $300,000 and your mortgage rate is the current average of 7.5%, you’ll owe $61 per day. If you close on the first of a 31-day month, you could be looking at nearly $2,000 in additional closing costs. Close on the 27th, however, and you’ll only owe $244.³

By timing your closing right, you can dramatically reduce your overall closing costs. 

• Explore a No-Cost Closing: Depending on your lender, you may not have to pay closing costs at all — but this approach comes with a catch. Through a no-cost closing, you trade closing costs for a higher mortgage interest rate. This could save you thousands of dollars up front, but the price you pay over the life of a 15- or 30-year mortgage may end up being much higher. Crunch the numbers yourself to see if this is the right financial decision before proceeding with a no-cost closing.⁴

Another option to consider is how to get closing costs waived. Some lenders may offer promotions, rebates, or negotiate certain fees if you have a strong credit score or are willing to meet specific conditions. It's worth discussing these possibilities with your lender to potentially reduce your upfront costs.

Understand Financing and Assistance Options

Strong negotiation and savvy timing aren’t the only ways to keep your closing costs low — there are countless programs designed to help qualified homebuyers cover these expenses. These programs range from grants to loans and also help veterans, low-income buyers, and others cover both downpayment and closing costs.

Before you embark on the homebuying process, research the many programs available to you to see what kind of assistance is out there. Depending on your situation, you may be able to get some (or all!) of your closing costs covered. 

Preparing for Closing Costs: Avoid Common Mistakes

Navigating closing costs can be challenging. There are a handful of common missteps buyers make when shopping for a home and paying for closing costs. Understanding these pitfalls will help you better prepare to pay for closing costs while skillfully avoiding them. 

Not Anticipating Costs

When anticipated months or a year in advance, mortgage closing costs can be fairly manageable. But when they pop back up just weeks before closing, they can be a major burden. Thinking ahead and making a plan for paying closing costs will prevent you from having to grasp for straws and resorting to personal loans or other short-term, high-interest solutions. 

Not Researching Assistance

Despite the many resources available to buyers to cover closing costs, many homeowners fail to seek help. If you’re in a position where you need financial support to help with closing costs, be the squeaky wheel: explore the many resources at your disposal and reach out to see how you can reduce your expenses. 

Not Budgeting for Closing Costs

Homebuyers typically have a budget in mind when they go househunting, but few go to the lengths of budgeting for closing costs. Seeing as closing costs can easily be an extra $10,000 or more, it’s crucial to account for these costs as you determine your total home budget. Use a rough estimate to set aside the proper amount of funds, and you’ll avoid ill preparation and unexpected expenses when it comes time to close. 

Assuming You’re Off the Hook as a Seller

Buyers bear most of the responsibilities of closing costs. But sellers have responsibilities of their own. And while your costs might be lower as a seller, it’s important not to assume you’re completely off the hook –– budget for these costs and seek out support just as a buyer might. 

Learn more about how much closing costs are for sellers to help prepare.

Closing Costs Wrap-Up

Paying for closing costs doesn’t have to be the dreaded final step before taking your keys and beginning a new chapter of life. With the proper planning, homebuyers can tackle these expenses with ease, with confidence, and without breaking the bank. They can also carefully explore alternative ways to pay closing costs, like Truehold’s sale-leaseback. 

If you’re selling your home, Truehold allows you to cash out your home equity without moving out. Instead, you can stay in your home as a renter, giving you ample time to shop for your next property or strategically plan your next move. This is unlike a traditional sale, where you’d likely be simultaneously shopping for your next home while navigating the sale process—and paying double the closing costs as a result. Also unlike a traditional sale: your closing costs are simplified down to a flat 5.5 percent. No unexpected expenses, no stressful negotiations, and no number-crunching needed.  

To learn more about closing costs visit the Truehold Library for free resources on home finance, homeownership, and how our sale-leaseback can help you unlock your home equity while simplifying the closing process. 

‍

Sources: 

1. Investopedia. Closing Costs: What They Are and How Much They Cost. https://www.investopedia.com/terms/c/closingcosts.asp 
2. SmartAsset. Closing Costs Calculator.  https://smartasset.com/mortgage/closing-costs 
3. Rocket Mortgage. How To Calculate Per Diem Interest. https://www.rocketmortgage.com/learn/how-to-calculate-per-diem-interest 
4. Bankrate. How to reduce closing costs: 7 negotiation strategies. https://www.bankrate.com/real-estate/how-to-negotiate-closing-costs/