As mortgage rates rise, so too do closing costs. Also against the home purchasing public is that new loan regulations and financial safeguards have caused bank costs to rise when they fund a mortgage loan, and the banks have understandably passed those costs on to the consumers to cover. In fact, mortgage closing costs rose 1.6% last year compared to what they were the year prior, and on average, home buyers paid $4,876 for closing costs. It can seem like there are a million fees you are responsible for! Besides, you did just save up a ton of money for a down payment. Now you have to worry about higher closing costs than you would have been asked to pay ten years ago!
But did you know that you can take precautions to keep your closing costs low? It’s true. There are ways to limit what you are charged during closing time, and if you want to have the lowest closing costs available to you, regardless of the type of mortgage you get, you can follow this list below. You can get a great closing cost rate too!
Before we get into what you can do to lower your closing costs, lets discuss what they are and how they work. All mortgage loans require that someone pay for the closing costs. Sometimes you’ll get lucky and the seller of your new home will pay them. Every now and then you can find a lender who will cover them, in a zero closing cost mortgage, but this is even more rare.
There are two general types of closing costs. First, you have mortgage lender closing costs, which may include origination fees, discount points, underwriting fees, document preparation fees, title fees, attorney fees, prorated loan interest, lender fees, application fees, assumption fees, pre-paid interest, or title search fees. You may also pay a mortgage insurance application fee if your down payment is less than 20% of your loan total amount, as well as some upfront mortgage insurance costs in the same case.
The other type of closing costs are third party closing costs. These are paid to companies other than your lender, and they include appraisal costs, credit report fees, tax service fees, property taxes, annual assessments to your HOA (if any), home inspections, flood certifications, escrow fees, and title insurance.
Lenders are required by law to provide you with a list of closing costs you are responsible for paying within three days of receiving your application for a mortgage loan. This list will be only an estimate of what you’ll pay, but it will give you a better idea of what to expect.
Now that we’ve gone over what closing costs are and what they consist of, lets talk about how to keep them low when you buy your home!
Negotiate with the Seller
This one can be tricky. There’s always room to negotiate when you buy a home, in many ways. You can negotiate the price of the home, or what the seller will provide or do for you if you buy. But you can also negotiate that the seller cover all closing costs if you buy, or lower the cost of the home to cover the closing costs you’ll have to pay. Be careful if you choose to go this route. If another potential buyer offers the same amount as you do, but does not ask that the seller cover closing costs, they’ll be the ones the seller strikes a deal with!
A seller will also be more likely to agree to this type of negotiation if you have presented him or her with at least the asking price of the house as an offer. To keep things on the safe side, you may consider only asking the seller to pay half of the closing costs. Things may also swing in your favor on this front – if, for example, the home inspector finds issues with the home that will cost you money to fix, you may ask for the seller to cover closing costs as a concession for this.
Negotiate with the Lender
Yes, you can do this too. Once you have your loan estimate, you can begin negotiating each fee on the list with your lender. If there are confusing or obscure fees, ask that they be removed. Request that you receive a closing disclosure form, which details your closing costs instead of just listing them. Compare your closing disclosure to your loan estimate and ask your lender to justify any discrepancies. This can make a big difference if there was anything there for you to catch!
Don’t Overpay on Discount Points
These are an upfront fee paid at closing that allows a new homeowner access to a better mortgage rate than “market value”. They can also lower your APR. They are paid as a percentage of your loan. For example, one discount point covers 1% of your loan size. Sounds great, right? There’s a catch! If you aren’t planning to live in your new home for at least seven years, this is wasted money. Reduce your closing costs by paying the proper number of points for your particular situation – which may be zero. Remember, they’re tax deductible, but can’t be refunded once you commit to paying them.
Another thing to be aware of when it comes to discount points is the interest rate environment. If you’re already buying in a low interest rate environment, you don’t need to pay for a ton of interest points to lower your interest rate even further. These points add up fast with one point being 1% of your loan value, and for each point you purchase, you’ll have to live in the home for longer if you want to break even. Consider both these two things when it comes to purchasing discount points and you may save a bundle come closing time!
Lock Your Mortgage Rate at the Right Time
There is a lot to be said for the idea that the timing of locking your mortgage can be up to luck. If you do it right, you can lower your closing costs by nailing the right time frame. Rate locks are typically available in 15 day increments up to 60 days, and then in 15 or 30 day increments afterwards. The longer your rate lock, the more you’ll pay, meaning a 30 day mortgage lock is less expensive than a 60 day lock.
The additional cost of a longer mortgage rate lock are paid at closing. See where we’re going with this? An extra 30 days on your rate lock may add up to 25 basis points (or 0.25%) to your mortgage rate! This doesn’t mean you should always choose the shortest rate lock time, though. If you don’t fund your loan during the originally agreed upon lock in window, you’ll be fined by your lender. You can, however, ask for a rate lock extension, which adds a little time onto your rate lock window. It usually works out that a 30 day rate lock window plus a 15 day extension is cheaper than a 45 day rate lock from the start. You can keep your closing costs a little lower by accurately choosing the best rate lock periods.
This may sound obvious, but one way to ensure you have low closing costs from the very start is to shop around for the lender that offers the lowest closing costs. You can ask lenders to match closing costs offered elsewhere, and they may agree. There are some services included in closing costs that you are allowed to shop around for as well. These include the pest inspection fee, the survey fee, the title search, and others. You don’t have to go with the provider your lender suggests unless you have signed a document waiving your right to do so. You can try for a lower price on the same service elsewhere. You’ll be able to see your expected closing costs on your loan estimate. Use these numbers to help you shop around and find better deals, thus lowering your closing costs.
Evaluate Your Loan Estimate
Bet you didn’t know you were allowed to do this, did you? When you get your loan estimate, don’t just accept it as fact. Ask your lender to go through each and every single charge with you in person. Ask them what each fee covers and why it costs that much. By doing this, you can identify padded or extraneous fees. You may also see two fees with very similar names, implying that you’re being charged twice for the same thing. It happens! An example is being charged for both processing fees and underwriting fees. You must review your loan estimate carefully. By doing so, you could save yourself some money come closing time.
Other Ways to Save
There are a few random other things you can do to lower closing costs. If your new home was recently appraised (say in the last year), you can probably skip the cost of having it appraised again and waive this service. You can also save on title insurance by asking for a re-issue rate when you renew your title insurance for a refinance.
Closing costs can seem daunting and stressful, but there are many things you can do to lower them. If you play your cards right, you’ll be thankful that you took the time to learn how to save a few dollars!