6 Expert tips for lowering closing costs
If you’re a first-time homebuyer, it’s easy to get caught up in the excitement of making plans for your new space. Even as you dream about color schemes, furniture placement, and the ideal layout of your new home, you’re probably also keeping a close eye on interest rates and your future mortgage payment. However, there are other transaction details you can easily overlook, such as the myriad of additional costs and fees charged to buyers as part of their home purchase transaction. These added expenses are called closing costs.
What are closing costs?
As your closing date approaches, your lender will provide a closing disclosure for you to review. It may be the first time you see an itemized list of one-time fees to pay on closing day in addition to your down payment. These standard closing costs pay the various parties involved in transferring ownership of the house from the previous owner to you. It’s important to review this disclosure for accuracy and to understand the various charges. This is the time to ask any questions before the deal is final. Here is a sample closing disclosure to familiarize yourself with the form.
What does a closing disclosure include?
Your disclosure will itemize your loan terms and the breakdown of the purchase price, principle, interest, payment amounts, and any fees associated with securing the loan. Capital Funding Financial shares a list of typical charges you’ll see on the closing disclosure:
- Lender Origination Points (often 1% – 3% of the loan amount)
- Buydown Points (any fee related to “buying down” or “lowering” the interest rate below PAR)
- Third-party fees (such as the appraisal, title policy, taxes, credit report fees, survey, and HOA fees)
- Prepaid Interest
- Taxes owed to the City or County
- Escrows required by the lender
- Property Insurance (Flood, Liability, Hazard, depending on where the property is located)
You want to ensure you understand the math and run through it yourself to double-check the numbers. No matter how professional and experienced your lender’s team is, mistakes happen now and then.
As you’ve seen from the example closing disclosure statement, the amounts can be significant enough to have you scrambling at the last minute if you’re not prepared. Your lender should provide both timely and reliable estimates, but you can get ahead of the curve by calculating your estimates so you’ll have a good idea of what to expect.
Who pays closing costs?
Closing costs are paid according to the terms of the purchase contract made between the buyer and seller. Typically, most of the closing costs will be paid by the buyer. The buyer will receive the closing disclosure and will be expected to pay the charges, but there are instances when the seller may have to pay some fees at closing too.
6 Expert tips for lowering closing costs
Closing costs are paid based on the terms of the purchase contract between the buyer and seller. As a buyer, you can negotiate prices and fees with any party involved in the purchase process to reduce closing fees. Here are six expert tips on reducing closing costs:
1) Generally, the buyer, or borrower, pays for closing costs. However, you can sometimes negotiate for the seller to pay some of these costs, known as “seller concessions.” For instance, you can make an offer on a house and ask that the seller pay for the inspection, the home warranty, or other closing costs.
2) For buyers who prefer to keep more cash in their pocket, it’s wise to consider asking for a seller to pay the buyer’s closing costs instead of a reduced purchase price. This can be a great way for buyers to spend less out of pocket when purchasing a home while still negotiating a good deal in the current market. When taking this approach, one thing to consider is that the seller will net the purchase price minus the amount paid toward the buyer’s closing costs. For example, if a home is on the market for $300,000, a buyer can ask for $10,000 in closing costs vs. offering $290,000. The offer is virtually the same for the seller.
3) Be sure to work with a mortgage lender that does not charge borrowers any lender fees, origination fees, or points to obtain a rate while still offering the borrower better rates. A borrower should always research online against any mortgage company they are interested in working with and ask many questions before committing their business to that company.
4) Another option is to negotiate with the lender to include lender fees in the loan, reducing your upfront fees. However, it’s important to note that while this lowers closing costs, it will increase your monthly payment and cost you more in interest over the life of the loan.
5) You can also lower closing costs by getting an appraisal waiver. Buyers who qualify can skip the in-person appraisal visit. Instead, the lender will use data provided by an automated underwriting system to determine the value of the home being sold, such as real estate comps and the previous selling price of the house the buyer is purchasing.
6) Consider using lender credits to offset closing costs. This is another way for buyers to reduce closing costs. Lender credits are when the lender agrees to cover all or part of a buyer’s closing costs. In exchange, the borrower pays a higher interest rate to repay any fees the lender covers. Lender credits can help the buyer avoid the upfront costs of buying a house so you can put more of your savings toward a down payment.
Homebuyers should plan for closing costs
As the clock ticks down to your closing date, the last thing you want is an issue popping up and causing the sale to fall through. You can eliminate this last-minute stressor when you prepare properly for closing costs.
Conventional loans require a downpayment of 20% of the home’s purchase price to eliminate private mortgage insurance (PMI). If it’s going to be challenging to come up with an additional 2-5% for closing costs, it may be worth making a smaller downpayment. You can then put the difference towards the closing costs and finalize the home’s purchase. Though you will have a slightly higher mortgage payment with PMI, you’ll still be able to close on the house.
Can homebuyers receive assistance for closing costs?
Many first-time homebuyer programs can assist homebuyers with down payment and closing costs. Many of these programs specifically serve first-time homebuyers, especially buyers with moderate and lower incomes. A first-time homebuyer is anyone who has not owned a home in the last three years. So, if you’ve owned a home previously, you might still qualify for one of these programs as long as you have not owned a house recently.
You can also use monetary gifts from friends and family to pay closing costs as a homebuyer. Ask your lender about any gift letter requirements and limits on amounts.
Many fees and costs make up the final closing costs when buying a home. Don’t let all of the numbers intimidate you. Ask your lender, title company, or your real estate agent to clarify if you have questions. It’s their job to help buyers and sellers finalize a property transfer. Just like you, they want the transaction to proceed smoothly – so you can move into your new home and begin enjoying your new space… READ MORE…
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