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Once your lender approves you for a home loan, you’re not quite at the finish line yet. You’ll still need to pay for closing costs, which are upfront fees related to the mortgage.
Buyers can expect to pay between 2% and 5% of the home’s purchase price in closing costs. For instance, if the value of your property is $500,000, you could contribute anywhere between $10,000 and $25,000 to these costs. But there are ways to reduce your costs.
Although purchasing a home is an important milestone, the process can be financially intimidating. In addition to the down payment, buyers have to deal with closing costs, which can drive up the total cost by thousands of dollars. However, there are ways to reduce or even avoid paying closing costs altogether. This guide will explore several tactics to reduce the closing cost burden so you can concentrate on the joys of becoming a homeowner.
Understanding Closing Costs
Closing costs encompass a range of fees associated with finalizing a real estate transaction. These costs typically include:
- Lender fees: Origination fees, processing fees, underwriting fees, and appraisal fees.
- Title fees: Title search, title insurance, and escrow fees.
- Government fees: Recording fees, transfer taxes, and other government-imposed charges.
- Prepaid expenses: Homeowners insurance, property taxes, and homeowner association fees.
- Third-party fees: Attorney fees, home inspection fees, and pest inspection fees.
Various factors, such as the loan amount, property location, and specific services needed, can affect the total closing costs. Closing costs are inevitable, but there are ways to lessen their financial impact.
Strategies for Reducing or Avoiding Closing Costs
1. Negotiate with Your Lender
Lender fees often constitute a significant portion of closing costs. Don’t hesitate to negotiate with your lender to reduce or waive origination, processing, or underwriting fees. Researching different lenders and comparing their fee structures can give you leverage in negotiations.
2. Negotiate with the Seller
In a buyer’s market, you may have more bargaining power to persuade the seller to contribute towards your closing costs. This can involve asking them to cover a portion of the fees or agreeing to a lower purchase price, effectively reducing the closing cost percentage.
3. Consider a No-Closing-Cost Mortgage
This type of mortgage incorporates closing costs into the loan amount, allowing you to avoid upfront payments. However, this option typically results in a higher interest rate, increasing the overall cost of the loan over time. Carefully weigh the pros and cons before opting for a no-closing-cost mortgage.
4. Explore First-Time Home Buyer Programs
Government-sponsored programs and local initiatives often offer assistance to first-time home buyers, including grants or low-interest loans to cover closing costs. Research available programs in your area and determine your eligibility to access this valuable financial aid.
5. Shop Around for Other Services
Fees for services like home inspections, title insurance, and legal counsel are frequently included in closing costs. You can get the best deals and possibly save hundreds of dollars by comparing quotes from several providers.
6. Delay Closing Until the End of the Month
The interest you pay on the loan can be reduced by closing at the end of the month because interest is normally computed on a daily basis. This strategy can shave off a few dollars from your closing costs.
7. Consider a Smaller Down Payment
While a larger down payment reduces your loan amount and potentially lowers closing costs, it also requires more upfront cash. If you’re struggling to meet both the down payment and closing costs, consider a smaller down payment, keeping in mind that this may result in higher monthly mortgage payments.
Additional Tips
- Be mindful of closing cost estimates: Lenders are required to provide a Loan Estimate outlining the expected closing costs. Review this document carefully and ask questions about any fees you don’t understand.
- Consider closing cost credits: Some lenders offer closing cost credits, which essentially reduce the amount you pay upfront.
- Explore seller concessions: In a competitive market, sellers may be willing to offer concessions, which can include covering a portion of your closing costs.
While avoiding closing costs entirely may not always be possible, employing these strategies can significantly reduce their impact on your finances. By negotiating, exploring assistance programs, and shopping around for services, you can approach homeownership with greater financial confidence and peace of mind. Remember to carefully evaluate each option and choose the strategies that best align with your financial situation and goals.
Look for Assistance
Since closing costs can prevent low-income buyers from becoming homeowners, most states provide programs to assist with these costs. First-time homebuyers or those whose income falls below a particular threshold are usually the recipients of aid, which can take the form of a grant or loan. Check with your state’s housing finance agency to see what’s available near you.
Consider a No-Closing-Cost Loan
A mortgage with zero closing costs might sound too good to be true. And in some ways, it is. Lenders that offer no-closing cost-loans cover your upfront fees. They’ll usually increase your interest rate to make up for the cost. Even though you might save money in the early years of the loan, those additional interest costs could eventually outweigh the savings you initially realized.
Alternatively, the lender might allow you to roll closing costs into the principal loan balance. Once more, you won’t need to pay cash at closing, but you will eventually have a bigger loan and pay interest on those closing costs.
9 Ways To Avoid Closing Costs When Buying A Home
FAQ
Is there any way around closing costs?
Can you negotiate no closing costs?
When should you close to keep closing costs low?
What do closing costs not include?
How can I avoid closing costs if I’m a home owner?
While there’s no way for you to outright dodge these fees, there are ways that homeowners can pay vastly less. Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender’s good-faith estimate (GFE) for an itemized list of fees.
How much do sellers pay in closing costs?
Seller closing costs are typically higher. On average, sellers pay roughly 8% to 10% of the sale price of the home in closing costs — the majority of this cost is made up by agent commissions. On a $300,000 home, that’s between $24,000 and $30,000. A lot of factors impact how much you’ll pay in closing costs.
How to reduce closing costs?
Let’s talk about some tips on how to reduce closing costs. When you’re negotiating a home sale, your lender will provide you with what’s called a Loan Estimate (previously known as a Good Faith Estimate or GFE) detailing what your closing costs are likely to be.
What happens if you don’t pay closing costs?
The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you’ll end up paying interest on the closing costs. Many of the closing costs you’ll pay as a buyer are related to the opening of your mortgage.