When you purchase a home using a mortgage, you are not only incurring the costs of the home itself but costs related to the actual purchase of the home, known as closing costs. These fees charged by your lender and third parties related to your home purchase typically range from 2 to 5 percent of the purchase price of a home.
If you are purchasing a $175,000, you could pay anywhere from $3,500 to $8,750 at closing, not including your down payment. Many homebuyers cite the upfront costs of homeownership as one of their biggest homebuying obstacles, but as a homebuyer, you are not powerless to your closing costs. Here are a few ways to minimize or avoid those fees at closing.
Negotiate with the Seller
Having the seller of the home pay closing costs can be a win-win situation for both sides of the transaction. Sellers who pay their buyers’ closing costs can expedite the finalization of the sale.
Talk to your real estate agent on the best way to include closing costs into your offer. You may need to offer a higher sales price, accept the property as-is, or meet the seller halfway in costs.
Consider a No-Closing Cost Mortgage
If the seller paying your closing costs is non-negotiable and you don’t have the available funds to close, talk to your mortgage lender about a no-closing cost mortgage.
Some lenders have the capability to waive costs in return of charging a higher mortgage rate or adding the costs to the loan balance. Keep in mind this will not only change your loan amount but monthly payment, as well. Depending on how long you plan to stay in the home, a no-closing cost mortgage might be the way to go.
You wouldn’t commit to a lender before knowing what your interest rate was, so make sure to ask about their closing costs as well. You are looking for the total package in home financing – a low interest rate and minimal closing costs. Ask each lender about their application, loan processing, origination, appraisal and third-party fees. Lenders are required by law to provide a written good faith estimate (GFE), which is an estimate of closing costs you will incur at closing, within three days of applying for a loan.
Ask Questions about Fees
Make sure the lender walks you through each of the charges on your GFE. Some of the third party charges, like appraisals and credit report fees, are non-negotiable, but other costs can fluctuate. Watch out for any “garbage fees”, which will be vague or duplicative charges.
Remember your GFE is merely an estimate and is subject to change.
Look Over Your Final Costs
When borrowers come to the closing of their purchase or refinance, lenders are required to provide settlement papers, known as the HUD-1 form. Ask about any major inconsistencies between your GFE and the HUD-1. Many homeowners quickly glance over the list but examining the line-by-line costs can save you if any mistakes are apparent.
If you are curious about our closing costs here at Compass, contact one of our mortgage bankers. For more information on home buying and financing, in general, download our free Mortgage 101 Handbook.