Cut Closing Cost when Buying a Home
Buying a house is an expensive endeavor. Saving for a down payment often takes a potential home buyer years and it typically takes 30 years to pay off a home loan. Added to the down payment and mortgage payments each month is another large cost that comes with buying a house: closing costs.
Closing costs are the costs associated with the purchase of a home. They come from charges by a mortgage lender, a real estate agent, your insurance company, and your local government. Typical closing costs include: title insurance, the appraisal fee, an inspection fee, points on the mortgage, a credit report, attorney’s fees, taxes, and more. They are charges that must be paid for with cash at the closing date.
Fortunately, there are a number of ways to cut closing costs when buying a home. Using the tips below and keeping in mind that you can negotiate your way through much of the buying process will help you insure that you don’t pay too much in closing costs.
Contents
Steps
Negotiate with the Seller
Typical closing costs are around 2-5% of the purchase price of the home. So on a $100,000 home, the closing costs will be between $2,000 - $5,000. Add this amount to a typical down payment of 20%, or $20,000, and it is easy to see why a home buyer would want to limit closing costs as much as possible.
- Negotiate the price of the home. Buying a house is a series of negotiations, the first of which is with the seller. Negotiating a purchase price for the home that you can afford will go a long way to helping you reduce your closing costs, since many of the closing costs are associated with the purchase price of the home. Keep your closing costs in mind when you settle on a final purchase price—a couple of thousand dollars may not seem like much when you are purchasing a hundred-thousand dollar home, but it may mean the difference between manageable closing costs and an amount that you cannot afford.
- Negotiate who pays the closing costs. Besides negotiating the purchase price, you can also negotiate to have the seller pay all or a portion of your closing costs. It may sound strange, but often a seller will be willing to “pay” a buyer to finalize the sale. A seller paying the buyer’s closing costs means that the buyer has more incentive to close the deal on the home, which benefits the seller because they get paid the purchase price sooner. Note that by asking the seller to pay your closing costs, you are essentially lowering the purchase price of the home, so keep that in mind when negotiating the purchase price of the home.
Shop Around for Lenders
- Find the best interest rate and lowest fees. It is standard practice for a buyer to shop around for the best interest rate for a mortgage, but for closing costs purposes it is also important to shop around for the lowest fees. Lenders charge a number of fees at closing, but the amount each lender charges for each item can vary.
- Make sure to review your good faith estimate before making any commitments. At the time you are qualified for a home loan (a mortgage), your lender is required to provide you with a good faith estimate of your closing costs. This estimate contains the fees that the lender will charge you at your closing. Compare different lender’s fees and choose the lender that has the right mix of a low interest rate and low fees. You can often negotiate some of the fees that the lender will charge, so be sure to ask your lender representative if you can get a better deal.
Accept a Higher Interest Rate Loan by Not Paying Points
Points on a loan are one of the largest closing costs. Loan points are paid to the lender and are equal to 1% of the total loan amount. Points are also known as the loan origination fee. On a $100,000 mortgage 1 Point equals $1,000.
- Choose a no-point mortgage. This means that you will not pay points at closing, and therefore on a $100,000 mortgage you can save $1,000 or more. The trade-off with no-point mortgages is that they are coupled with a higher interest rate.
- The only way to decide whether a no-point mortgage is worthwhile is to do the math and determine if a slightly higher interest rate over the course of the loan is worth saving money on paying points.
- As a general rule, if you intend to own the home for a short period of time, a no-point mortgage may be the best option.
Close Later in the Month
- Schedule your closing for as late in the month as possible. Lenders will collect interest for the current month at the closing, so set your closing date for as late in the month as possible to ensure that this amount is low. Closing at the beginning of the month means that you pay for an entire month of interest, but closing at the very end means that you will only pay a small fraction of a months worth of interest.
Tips
- When you begin looking to buy a house, it is a good idea to keep in mind the amount of money you will need to have available at closing in addition to your down payment. An online closing cost calculator can help you get a realistic picture of the amount of cash you will need to have on hand when you close on your home.
