When you’re buying a home, the last thing you want to worry about is closing costs. But unless you’re paying in cash, they’re inevitably going to be part of your purchase price. So how can you minimize them?
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Purchasing a house comes with many expenses, but there are ways to minimize the various costs, including closing costs. One often-overlooked way is to negotiate the price of the house down to effectively cover the fees. Another is to investigate programs in your city, county, or state that provide grants and mortgage buydowns that cover the closing costs for first-time homeowners. Let’s continue reading to learn more!
WHAT ARE REAL ESTATE CLOSING COSTS?
The fees that one pays to the mortgage lender for originating and providing the mortgage are termed closing costs. When you buy a new home, there are many costs involved in the closing process. These include paying your mortgage lender’s fee for structuring and financing your mortgage, taxes on property deeds that will be recorded when it changes hands at the end of the purchase agreement period (also known as “due-on Sale”), appraisal fees for the property, and title search fees which help ensure that the title is properly recorded and any liens against it are identified and satisfied. Your local government may charge additional fees such as for a certificate of occupancy, or if architectural or engineering modifications will be made.
When it comes right down to it, it’s hard to say precisely what real estate closing costs include or exclude because there is no standardization. The fees you pay your lender will depend on many factors including your lender’s profit targets and how strong or slow demand is. That said, generally, closing costs include the following:
· Home appraisal fee
· Loan origination fee
· Application fee
· Credit report fee
· Title search fee
· Lender’s title insurance
· Owner’s title insurance
· Monitoring fees
· Tax monitoring fee and tax status research fee
· Survey
· Attorney and notary fees
· Government recording fee
· Transfer taxes
· Escrow property taxes
· Prepaid daily interest charges
· Mortgage insurance
HOW TO REDUCE CLOSING COSTS
In today’s hot housing market, it’s very difficult to eliminate closing costs through having the seller, for instance, pay for them in full. There are, however, a few ways that homebuyers can reduce their closing cost tab. Here are a few tips on how to make it happen.
SHOP AROUND FOR A GOOD MORTGAGE RATE
The mortgage process is a negotiation, and for that, you need to start with your lender. Shop around to find an offer without any closing costs- most of which can be negotiable! For instance, if you have your checking account, savings account, and credit cards from one bank, don’t expect that bank to necessarily provide you with the best deal. Certainly give your home bank the benefit of the doubt and offer them the opportunity to compete for your business, but spend time researching other lenders as well.
Your objective is to line up your roster of potential lenders and compare each on a cost component by cost component basis. This will ensure that there are no hidden fees and that you’re able to negotiate each element of your closing costs.
· ASK THE SELLER TO PAY SOME OF YOUR CLOSING COSTS
If you are purchasing a home from a seller who is anxious to sell, or are buying a house that has very few interested buyers, then consider asking the seller to pay some of your closing costs. This could include paying for attorney fees and title insurance, which are necessary when buying a home in most cases (but not always).
· GET PRE-APPROVED FOR A MORTGAGE BEFORE YOU START SHOPPING FOR HOMES
Shopping for a home is an exciting process, but it can be overwhelming too if you don’t know what to look out for. One of the most important things that anyone looking at buying their first house needs is pre-approval letters from banks or other financial institutions. A mortgage lender issues a pre-approval letter only after determining that your credit history and budget fit within their lending profile and options. A pre-approval letter can save you money in the closing process because it minimizes the possibility of last-minute and often unexplained fees to be added to your loan or required at settlement.
· ASK YOUR LENDER TO SCHEDULE YOUR CLOSING DATE AT THE END OF THE MONTH
A closing date that is scheduled for the end of the month rather than one in the middle or beginning of the month can reduce the amount of cash required at closing. This is because the interest portion of your closing costs will only amount to a day or two of interest if you close at the end of the month rather than at the beginning.
· DON’T BUY POINTS IF YOU WON’T BE STAYING IN YOUR HOUSE LONG TERM
A point on your loan equals one percent of your mortgage. Meaning, that if your mortgage is $200,000, then one point is a $2,000 cost. Lenders will sometimes suggest that they can reduce your mortgage rate by having you buy points. The costs for points, however, have to be paid at settlement, which increases your closing costs. Also, if you only intend to live in your house for a few years, you won’t be able to benefit from the lower mortgage rate long enough to make up the cost of the points.
· VARIOUS GOVERNMENTS PROGRAMS
Look into municipal, county, and state government programs, which are often targeted at first-time homebuyers. Such programs offer a range of benefits including providing funding to help with your down payment, your closing costs, or both. First-time homebuyer programs vary depending on what state you live in, so be sure to do your research ahead of time.
FINAL THOUGHTS
So, there you have it. Six ways home buyers can reduce their closing costs. Most of these tips are simple and easy to follow. If you want to save money on your next home purchase, start by shopping around for a good mortgage rate, asking the seller to pay some of your closing costs, scheduling a settlement to occur at the end of the month, and determining whether buying points makes sense for you, leveraging first time home buyer programs and getting pre-approved for a mortgage before you start shopping for homes. Of course, every situation is different and there may be other ways to reduce your closing costs. Let us know which of these worked for you!
YOU CAN ALSO READ: BENEFITS OF HOMEOWNERSHIP YOU MAY HAVE NEVER CONSIDERED
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