Lower Your Closing Cost Bill
If buying or refinancing a home is in your future, you’ll be paying closing costs.
According to the Federal Reserve, a good rule of thumb for closing costs is 3% of your home’s price. However, some applicants pay as much as 6% depending on their lending, loan amount, and location.
Some things you can’t control — like where you live.
Fortunately, you can take actionable steps to reduce your costs.
The first step is to understand the costs of a loan. From there, you are in a better position to find cheaper providers and negotiate your fees.
What Are Closing Costs?
There are a number of fees involved for obtaining a mortgage loan. These charges are known as closing costs.
Lenders incur hard costs in a mortgage transaction for your credit report, appraisal, attorney services, title insurance, and more.
The lender passes these costs on to you.
However, they don’t always have to be paid for by the borrower.
Mortgage closing costs can be covered by the mortgage borrower, the seller, the lender, or a combination of the three.
Lenders, to retain business, sometimes give a closing cost credit — a contribution toward your costs — if you ask them.
Home sellers will also contribute to closing costs to attract buyers. But don’t expect anything from sellers in a hot market. They know they can sell the home for top dollar without providing closing cost assistance.
Location And Closing Costs
Location is an important factor. Closing costs can vary widely depending on the area in which you live.
Closing costs are higher in places where the cost of living is also higher.
Hawaii, for example, has the highest average closing costs in the U.S. at $2655, according to a Bankrate study. Pennsylvania has the lowest closing costs at $1837. The national average is $2128.
Certain taxes and fees apply in some geographical locations but not others. While you can’t avoid these fees, it helps to understand what they are. Don’t be afraid to ask your escrow company about them.
Other Costs Associated with a Mortgage Loan
In addition to the “standard” closing costs, there are a number of other fees that are often incurred when obtaining a mortgage loan.
Also known as “per diem”, prepaid interest charges accrue between closing and the date of your first mortgage payment.
Homeowner’s insurance covers possible damages to your home. Your first year’s premium, or a portion of it, is usually paid at the time of closing.
Typically, lenders will require that any tax bills that are due within 60 days of the time of closing be paid at closing.
Escrow deposit for taxes and insurance
In addition to prepaying your homeowner’s insurance and property taxes for the year, lenders will collect around two months of taxes and insurance at closing.
Loan discount points
Points are known as prepaid interest and are meant to buy down your interest rate for the life of the loan. Generally, one point is equal to one percent of the loan amount.
Ways To Save On Your Closing Costs
The following are strategies to lower your closing cost bill.
These methods can lower your cash-to-close requirement or reduce the amount added to your mortgage if you are wrapping closing costs into the new loan amount.
1. Compare costs
Most people know to shop and compare mortgage rates. But rate shopping isn’t the only comparison you should you make when buying or refinancing.
You should always get an estimate of a lender’s charges so that you can compare them to others.
Besides getting quotes from different lenders for rates and fees, you also can shop for other services such as title companies, home inspections and closing attorneys.
2. Close near the end of the month
Timing your closing for the end of the month will help you save on prepaid interest.
For example, closing on December 30th instead of December 15th will save you 15 days of prepaid interest – the interest you pay between your closing date and the end of the month.
Using this example, on a $220,000 loan amount with a 4% interest rate, you’d save $329.
3. Don’t overpay loan discount points when rates are low
Loan discount points are a one-time upfront fee paid at the time of closing to get a lower interest rate.
Paying discount points can be advantageous for homeowners that plan to keep their mortgage for a period of 5-7 years.
Otherwise, rates are low enough that you may need to pay points. Ask your lender to show you comparisons with and without points.
4. Opt for low or no closing costs
A great alternative for homeowners looking to save on out-of-pocket expenses is a low, or zero-closing cost loan.
Instead of buying down the interest rate with loan discount points, homeowners can also buy up the rate. In exchange for paying a slightly higher interest rate, lenders will cover some or all the closing costs. Ask your lender for comparisons.
5. Check the numbers… then check again
These days, lenders provide Loan Estimates instead of Good Faith Estimates. Loan Estimates have made things easier, but they can still be intimidating.
Ask your lender to go through each item to clarify the amount and the accuracy of the charge. Make sure that the fees on the Loan Estimate match the fees on your Closing Disclosure. If they don’t ask your lender why not.
6. Ask the seller to help with closing costs
If you’re buying a home, it’s not uncommon to ask the seller to contribute towards paying some or all of your closing costs.
Your loan program may limit the percentage of costs the seller can pay. Be sure to ask your lender how much the seller can pay according to your particular loan.
Then work with your real estate agent on how to structure your offer accordingly.
What Are Today’s Mortgage Rates?
Closing costs can make a sizable difference on whether or not you’re getting a “good deal” on your mortgage loan. It pays to understand the costs associated with your loan, and to shop around.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to live mortgage credit scores.