When you purchase a home using a mortgage, you are not only incurring the costs of the home itself but costs related to the actual purchase of the home, known as closing costs. These fees charged by your lender and third parties related to your home purchase typically range from 2 to 5 percent of the purchase price of a home.
If you are purchasing a $175,000, you could pay anywhere from $3,500 to $8,750 at closing, not including your down payment. Many homebuyers cite the upfront costs of homeownership as one of their biggest homebuying obstacles, but as a homebuyer, you are not powerless to your closing costs. Here are a few ways to minimize or avoid those fees at closing.
Negotiate with the Seller
Having the seller of the home pay closing costs can be a win-win situation for both sides of the transaction. Sellers who pay their buyers’ closing costs can expedite the finalization of the sale.
Another approach would be to include closing costs as part of your offer. Talk to your real estate agent about the best way to include closing costs with what you offer as a purchase price. You may need to offer a higher sales price, accept the property as is or meet the seller halfway when it comes to closing costs.
Talk to your real estate agent on the best way to include closing costs into your offer. You may need to offer a higher sales price, accept the property as-is, or meet the seller halfway in costs.
Consider a No-Closing Cost Mortgage
If the seller will not–or cannot–negotiate about paying your closing costs and if you don’t have funds available for closing, talk to your mortgage lender about a no-closing cost mortgage.
Some lenders have the capability to waive closing costs in return for charging a higher interest rate. However, the higher rate will result in a higher monthly payment. Depending on how long you plan to stay in the home, a no-closing cost mortgage might be the way to go.
You wouldn’t make a commitment with a lender before knowing what your interest rate would be, so make sure to ask about closing costs as well. You want to know what you’re paying for the total package in home financing, and you’re looking for a low interest rate and minimal closing costs. Ask every lender with whom you speak about all the fees involved in the process—the application fee, the loan processing fee, the origination fee, the fee for appraisal and any third-party fees.
Within three days of applying for a mortgage loan, lenders are required by law to provide to you a written Loan Estimate (LE) which approximates the total costs you will incur at closing.
Ask Questions about Fees
Make sure the lender explains each of the charges on your LE. Some third-party charges, such as appraisals and credit report fees, are non-negotiable. Other costs, however, can fluctuate. Watch out for any “garbage fees,” a term used for vague or duplicate charges.
Remember that the LE is an estimate and is subject to change.
Look Over Your Final Costs
When borrowers come to the closing for their purchase or refinance, lenders are required to provide settlement papers, known as the Closing Disclosure (CD). An initial CD is required to be provided to you at least three days prior to closing. Compare the LE with the CD and ask about any major inconsistencies between the two. Many homeowners simply give a quick glance at these documents but reviewing each line item and noting any discrepancy can avoid delays at closing.
If you are interested to know about closing costs here at Compass Mortgage, contact one of our loan officers. For more information on home buying and financing in general, download our free Mortgage 101 handbook.