Mortgage 101: How to Reduce Closing Costs
The Price of Admission
If this is your first time buying a house then you may be surprised at how much extra cash you’ll need to part with just to get the deal done. Whether you’re a seasoned home buyer or a newcomer to the residential real estate game, you may be interested to know that some of those extra costs can be reduced and a few of them can potentially be sidestepped entirely. Interested in saving money on your next home purchase? Of course you are! Stay with us.
What Are Closing Costs?
Closing costs include a wide array of expenses that have to be paid when the home is purchased. Brokers, surveyors, and attorneys are often paid at closing, and lenders charge application, processing, and credit report fees. If you elect to purchase points to lower your mortgage rate then that expense will be due at closing as well. You should also expect to pay for prorated interest, escrow property taxes, advance homeowners insurance, appraisal… the list goes on and on.
Negotiate With the Seller
Sellers are legally allowed to pay for 2-9% of closing costs, depending on the loan type. If you’re in a seller’s market then don’t expect much in the way of concessions. However, you may be able to get the seller to foot the bill for some of your closing costs in exchange for accepting a higher contract price. That way, you can spread the cost over the duration of your mortgage instead of paying for everything up front. If you’re dealing with an eager seller in a colder market then you may find them amenable to footing the bill for a portion of your closing costs just to get the deal done. And remember, many closing costs are tied to the overall sale price, so every price reduction you can negotiate means lower closing costs, as well.
Your lender may be willing to roll some of your closing costs into your mortgage if you’re willing to pay a slightly higher interest rate. It’s a tradeoff, as you’ll probably end up paying them back several times over for the courtesy, but it still allows you to improve your short-term cash flow situation, which may come in handy at a time like this.
It may be tempting to just go with whichever lender your agent recommends, but shopping around can save you a lot of money. Check with different lenders and read the fine print. You never know: you could end up saving thousands just by switching lenders. The same goes for title and homeowner’s insurance, and home inspections. You’ve got a lot on your plate, but it’s worth shopping different providers when there’s this much money at stake.
Close at the End of the Month
Prepaid interest is charged at a daily rate from the time you close to your first mortgage payment. If you close at the end of the month, you’ll have fewer days of interest accrued, and that can reduce your closing costs substantially.
The down payment isn’t a fee per se, but it is a substantial financial outlay due when you purchase a new home. Conventional wisdom holds that 20% is the minimum, but as you may already know, you don’t necessarily need to pay that much to get a mortgage. In fact, FHA-backed loans may allow a down payment of as little as 3%, and if you meet certain conditions (military service being one), then you might be able to qualify with no down payment at all. However, it’s important to remember that with less than 20% down, you’re required to pay for private mortgage insurance until your loan-to-value ratio reaches 20%. If you live in a particularly hot market, that could happen rather quickly.
There’s a chance that your real estate agent may be willing to give you a credit toward your closing costs if they’re especially eager to have your business. It doesn’t hurt to ask.
Closing in on Homeownership
Buying a home is exciting, but it’s also expensive, and because of this, it pays to save as much as you can on closing costs. That way, you’ll have plenty of spare cash to pay for stuff like your moving van, some flowers for your walkway, and paint for the master bedroom.
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