As if the purchase price of a home isn’t expensive enough, there are also plenty of other expenses associated with closing that can really add up. In fact, these closing costs can add up to be anywhere between 2% to 5% of the purchase price of the home, on average. The more expensive the home, the more you can expect to pay in closing costs.
While you can’t avoid paying these fees, there are certain ways that you can effectively reduce them and lower the financial burden of a home purchase.
What Closing Costs Can You Expect to Pay?
Your Loan Estimate – which was previously referred to as a ‘Good Faith Estimate’ – will list the closing costs that you’ll likely be responsible for paying, and can include any of the following:
▪ Loan origination/underwriting fee: the amount your lender will charge you for the costs associated with processing the mortgage.
▪ Loan application fee: the amount charged for your mortgage loan application being reviewed.
▪ Title search fee: the cost associated for the title insurance company to investigate the title of the property.
▪ Credit report fee: the cost associated with having your credit report retrieved and reviewed.
▪ Home appraisal fee: the cost to have an appointed appraiser assess the value of the property.
▪ Survey fee: the cost associated with having the property assessed in terms of boundary lines, roadways, gas lines, easements, encroachments, and improvements on the property.
▪ Attorney fees: legal fees to pay lawyers to review documents and agreements.
▪ Mortgage insurance: Private Mortgage Insurance (PMI) will need to be paid if you put less than 20% down on the property with a conventional mortgage.
▪ Escrow property taxes: advance property tax payments that will be held in escrow, as per the lender’s requirements.
This list is by no means exhaustive, but includes some of the more common fees that appear at closing time and can cost thousands of dollars on top of the price you agreed to pay the seller for the home. It’s imperative that you take such costs into consideration when budgeting for a home purchase.
How Can You Lower These Costs?
The above list can seem overwhelming, but there are certain ways to trim the costs down.
There’s no harm in shopping around for a lender who can offer you the lowest closing costs. Just like you would comparison shop for any other type of service, comparing the costs and services from one lender to another can help you find one that will help you keep your costs to a minimum. Not all lenders charge the same types of fees or the same amounts on each type of fee. Do some homework, make a few phone calls, and find a lender who is willing to extend the lowest rate and lowest fees.
Go Through the Loan Estimate Carefully
There’s a reason why the “Know Before You Owe” mortgage disclosure rules came out not too long ago: to give borrowers ample time to go through the Loan Estate and other mortgage documents that more clearly spell out every cost associated with a home purchase.
When you get your hands on your Loan Estimate, take the time to go through every item carefully. This will help you identify any fees that are either inflated or are completely unnecessary. Closing costs have become much clearer since the new disclosure rules, but it’s still worth going over the Loan Estimate very carefully.
Close at the End of the Month
When you close on your home loan, you need to pay any accrued interest from the closing date through the end of the month. The closer to the last day of the month that you close, the less interest you will owe at closing for that particular month.
For instance, if you close on June 29th, your closing costs will include any accrued interest for June 29th and 30th. On the other hand, if you close on June 10th, you will owe accrued interest from the date of closing to the last day of June. Closing more towards the end of the month will certainly save you quite a bit of money on pre-paid daily insurance charges.
Use Seller Contributions
Seller contributions can effectively save you a lot of up-front closing costs that you’d otherwise have to pay out of pocket. These contributions can be put towards many of the closing costs listed above, though they cannot be used towards the down payment.
When you’re negotiating with the seller on the final sales price, discuss any potential seller contributions. While this will entail a slightly higher purchase price, the closing costs won’t have to be paid at the time of settlement. The maximum permitted amount of seller contributions will vary based on the type of mortgage, your loan-to-value ratio (LTV), and the type of property you’re buying.
Use Lender Credit
A lender credit involves an agreement between you and your lender whereby you accept a higher interest rate on your mortgage in exchange for reduced closing costs.
For instance, you might be given the option of a 3.89% interest rate on your home loan with $4,000 in closing costs, or a slightly higher rate of 4.00% with a $3,000 credit back to you. You’ll be paying a little bit more every month in interest costs, but the up-front out-of-pocket expenses can be greatly reduced.
Don’t Bother Paying For Points in a Low-Interest Environment
In a high-interest rate environment, buying down points is a potentially attractive option to lower interest rates and effectively lower your monthly interest payments on your mortgage. However, considering the low-interest environment we’ve been immersed in over the past few years, buying down points might not be the best option right now.
With a low-interest rate, you likely do not have to pay extra for points to reduce your interest rate. Every point costs 1% of the mortgage value, so paying for points can really add up. Not only that, the money needed to pay down points must be paid up-front as part of your closing costs. Without such a payment, you can cut back on the amount of your closing costs.
Negotiate the Fees
Once you know what you’re responsible for paying to the lender in terms of closing costs, you have the right to negotiate these costs. Don’t be shy to ask for certain odd fees to be eliminated from the final price. Request a copy of the Closing Disclosure form that lists the final closing costs in detail, and compare the items on there with what is on your Loan Estimate. If you notice any flaws, ask the lender for clarification, and use them as a negotiating tool.
The Bottom Line
Closing costs can’t be avoided, but that doesn’t mean you have to accept them at face value without doing a little research and using some negotiating skills to trim them down. Consider the above tips to help reduce the overall amount of money you’re responsible for paying in full come closing time to put a little less stress on your pocketbook.