Purchasing a home can be an exciting and monumental moment in life yet having to pay thousands of dollars in closing costs out of pocket can take a toll. In worst cases, first time home buyers may be completely unprepared to pay closing costs, let alone understand how expensive they can be. If you share any of these sentiments, perhaps you have wondered how to avoid closing costs. Again, although eliminating these costs is not possible, researching strategies for minimizing these costs as much as possible could save you hundreds, or even thousands, of dollars.
What Are Real Estate Closing Costs?
Closing costs are additional fees paid at the end of the home buying process. The stage of a real estate transaction during which the property title is officially transferred from the seller to the buyer is called “closing.” At this time taxes and fees associated with the purchase of the home are assessed, thus explaining the origin of the term. Closing costs usually range between six to three percent of the property’s purchase price, fluctuating based on local, state, and national property tax rates.
Closing costs facilitate the closing process and pay for everything required to complete a real estate transaction outside of the purchase price. For example, some of the costs will be dedicated to the mortgage origination. The bank will charge a fee to “originate” or create a loan — usually one percent of the mortgage amount. The buyer is responsible for that fee, and many others, in the form of a closing cost. Here are some other closing costs to expect:
· Property appraisal fees
· Real estate agent fees
· Loan origination
· Survey fee
· Cost of running a credit report
· Home inspection fees
· Cost of completing a title search
· Taxes on the home loan amount
· Document recording fees on the deed and mortgage
· Escrow deposit
· Mortgage points
· Attorney fees
· Private mortgage insurance
When it comes to the question of who pays closing costs when selling a house, it should be noted that both buyer and seller are responsible. Note that the buyer will be responsible for most of the fees, particularly when it comes to the loan origination, loan taxes, and credit assessment.
An escrow deposit, managed by a neutral third-party escrow officer, covering typically two months of prepaid property taxes and mortgage insurance payments
How to reduce closing costs
You can and should negotiate your closing costs, especially as the price tag on buying a home continues to rise. Although there is no way to eliminate all taxes and fees, there are methods to drastically cut down on some of the negotiable line items. In October 2015, the Consumer Financial Protection Bureau put into effect the Loan Estimate, which requires lenders to provide a thorough breakdown of the mortgage loan you have applied for, including the closing costs. The Loan Estimate has made it particularly helpful for shoppers who are interested in negotiating their closing costs before committing to a mortgage loan.
Although cutting out closing costs outright is not possible, there are strategies to minimize costs through negotiation. When examining who usually pays closing costs, an extensive amount falls on the buyer. However, the buyer can negotiate in such a way that some of the fees are reduced or assumed by the lender or shifted to the seller’s closing costs. Below you will find some creative tactics on how to avoid closing costs as much as possible:
1. Negotiate A No-Closing Costs Mortgage
In some cases, the buyer can negotiate a mortgage that does not have any closing costs. However, remember that closing costs must be paid in one way or another. In this case, the lender will typically raise the interest rate or will bundle closing costs into the total cost of your mortgage.
2. Negotiate with The Seller
Closing costs for sellers typically include commission fees, loan payoff costs, and transfer taxes, to name a few. In some cases, buyers can negotiate with the seller in such a way that the seller pays closing costs instead. Many loans will allow sellers to assume these costs in the form of a credit as a way for them to help seal a deal and is also a tax-deductible expense.
3. Comparison-Shop for Services
Many closing cost line items are service fees, such as from the title insurance, homeowner’s insurance, and home inspection companies. Buyers should not hesitate to shop around for loan products and service providers that offer competitive rates.
4. Negotiate Origination Fees with The Lender
When working with a lender, inquire about a fee reduction, waiver or credit to help offset some of your closing costs. When shopping for lenders, keep in mind that they are required to provide a Loan Estimate upon completing your mortgage application. This allows you to scrutinize the line items included in the closing costs, such as application fees or attorney fees. However, be wary of scenarios where the lender will offset your closing costs by increasing your interest rate or bundling them into your total mortgage cost. Finally, keep in mind that some lenders offer loyalty programs for current customers, through which origination fees are reduced or waived.
5. Close Towards the End of The Month
A home buyer becomes legally responsible for repaying their mortgage loan once their home purchases closes. If the loan closes mid-month, the buyer will typically make their first mortgage payment on the first of the following month. In this case, per diem interest fees are assessed between the closing date and the date of the first mortgage payment. Buyers who close their home purchase as close to the end of the month as possible can minimize these per diem interest fees.
6. Check into Army or Union Discounts
If you belong to the military or a union, you may have financial assistance when purchasing a home, including discounts or rebates for closing costs. Make sure to research your benefits before shopping for mortgage loans.
7. Look for a loyalty program.
Some banks offer help with their closing costs for buyers if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for “Preferred Rewards” members. It’s the bank’s way of offering a reward for being a customer.