Closing on a home often equates to a large out-of-pocket expense for the buyer. Most lenders require home buyers to put at least 5 percent down when they purchase a home. In addition, the average closing costs for a home are about 3 percent; in areas with higher tax, they can be as high as 7 percent of the property’s value. Thankfully, there are a few different things you can do to reduce the out-of-pocket costs involved with purchasing a home.
Shop around for the best rate and bank fees
A few years ago lenders were able to roll many of your closing costs into your loan and offer you a “no down” home loan option, but no down mortgages are basically extinct and lenders are again charging fees for almost everything. Because of this, it pays to shop around for loans with the best terms and that means more than just looking for the best interest rate, shop around to ensure you’re not paying too much in fees.
You should make it a point to call at least three lenders to check for the best rates and the best estimates on fees. Get a good faith estimate from the lender that quoted you the lowest rates and fees, but don’t go with a lender just because their fees are less, a lower interest rate may save your more cash in the long run. If you have the money to spare and are willing to pay for another application fee, you should get two estimates, which will force the lenders to compete with each other for your business. Competition usually means you’ll get a better deal, and over the course of your loan, a small difference in your interest rate can mean thousands of dollars.
*Credit Unions typically charge less for closing costs; you can use an estimate from a credit union to negotiate with a bank.
Ask the seller to pay your closing costs
There is absolutely no reason why you shouldn’t ask the seller to pay some or even all of the closing costs on your home loan. You won’t always get a seller that will agree to help with closing costs, but it never hurts to ask. In some cases, the seller will just increase the price of the home to cover the closing costs, which decreases your initial out-of-pocket costs, but you end up paying the closing costs, and then some, as you pay down your mortgage.
Keep in mind that there are limits on how much a seller can contribute. With at least 10 percent down, Fannie Mae and Freddie Mac allow a seller to pay up to 6 percent of the purchase price of the home; the FHA (Federal Housing Administration) also allows up to 6 percent and the Department of Veterans Affairs will allow up to 4 percent.
Hey seller, can you pay for my private mortgage insurance too?
If you put less than 20 percent down on your home, you are required to pay for private mortgage insurance; PMI monthly premiums typically range between 0.5 percent and 1.5 percent of your yearly loan amount. The amount you pay in premiums is dependent on the amount of equity you have in the home, your credit score and whether your loan is a fixed loan or an adjustable rate loan. You can save money on your Private Mortgage Insurance by asking the seller to pay the first year’s premium, or you can roll the cost of the insurance into your loan. There are limits on how much your seller can contribute, so it may be impossible for them to pay the direct fees associated with your home loan and your private mortgage insurance.
Find less expensive title insurance
Title insurance is necessary because it protects against challenge to ownership. Title insurance has separate coverage for you and your lender. You should know that as much as 80 percent of the premiums paid go to the title agent as commission. There are companies like Entitle Direct that completely eliminate the middle man and claim to save consumers as much as 35%. There’s really no reason why you shouldn’t shop around for less expensive title insurance.
See Also:
A Catch 22 – Closing Costs Paid by the Seller – TheMortgageInsider.net
Don’t Overlook Tax Break of Mortgage Points – Bankrate.com
What are Title Insurance Policies and Do You Need Them? – About.com
Resources:
Easing the Pain of Closing Costs – TheWashingtonPost.com
How to Save of Mortgage Closing Costs – Interest.com
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In this market, most sellers will agree to pay your closing costs. You never know if you don’t ask!
That is correct Indy, especially here in Las Vegas. Most homes on the market are bank owned, and quite a few of them will pay closing costs. One thing you need to remember is that some of the closing fees are more now, so 3% may not cover everything.
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It is always wise to ask for help with the closing cost for your clients.
Ask for the max allowed and your will then have a good stepping stone to get some closing costs paid and maybe all the closing cost paid by the seller.
First time buyers seem to have more difficulty providing the closing costs than other buyers. The reason for this is multifactorial.
#1 Naivety–They had no idea this fee existed–much less that they would be responsible for it–and have not calculated it into their budget.
#2 Lower Income–They tend to be younger and have lower earning power than older people who are established in their careers. Therefore, they don’t have as much disposable income to save toward covering the closing costs.
#3 Lack of Discipline–They want to buy a house, but are unwilling to make the necessary concessions in their lifestyle to make it a reality.
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You’re on the right track in saying that consumers should shop for their title insurance policy. After all, nearly 70% of closing costs are related to title work.
Entitle Direct and companies like them are not necessarily the best plan of action, though. In fact, their charges are right on par with many independently owned title companies, no lower. A local company, however, is familiar with market conditions in the area. If something were to happen, they are close by to assist the consumer. It’s a greater value for the same money.
Some title companies offer a guaranteed quote for settlement services up front, so you can estimate exact expenses.
When it comes to mortgage closing costs, the buyer should be sure to ask for a good faith estimate at the beginning of the mortgage process and just before closing on the loan. Some costs can change and the buyer needs to be aware of this before the actual closing so there are no surprises.
Hi Teresa:
Great post on closing costs. Sadly many first time home buyers do not understand all the cost involved in closing a mortgage.
Please everyone, be sure to get a good faith estimate at the beginning of the mortgage process and again just before closing on your loan. Many of the costs can change and this way you will know exactly how much you need at the closing table.
Mortgage Closing Cost
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