A home is probably the most expensive purchase you will make in your lifetime. Even relatively affordable houses cost hundreds of thousands of dollars, and mortgage loans can last decades. As such, choosing the right loan is an essential part of the home buying process.
When comparing loans, people often look at the length of the loan, the interest rate, and the monthly payment. All of these factors affect how much they’ll pay over the life of the loan. However, borrowers often fail to consider the closing cost of the mortgage. This is a mistake. Closing costs can set you back as much as 5% of your new home’s value, which can add tens of thousands of dollars onto the cost of your home. Taking steps to save money on closing costs is an important part of keeping your budget low when buying a home.
What are closing costs?
Closing costs are any costs that you have to pay on the mortgage at the time that you sign the paperwork and close on the deal. They aren’t part of the balance of your loan, and they aren’t billed to you monthly with your mortgage bill. You have to be ready to pay them upfront, all at once.
The most common mortgage closing costs include:
This is by no means an exhaustive list. A huge range of fees may be included in closing costs. Because there are so many, it’s easy to get lost when figuring out exactly what fees are contributing to your closing costs.
Saving money on closing costs
Closing costs can add up to a significant amount, increasing the cost of your home by thousands of dollars or more. Worse, the volume and variety of fees rolled into your closing costs makes it hard to determine exactly what you’re being charged for.
The first step toward saving money on closing costs is to ask for an itemized list of all the charges being rolled into your closing costs. Once you have that information, you can take further steps to reduce those costs.
Here is a list of the nationwide averages. Fees in your area can vary widely but it gives you an idea of what each item will typically cost.
One of the most basic steps you can take to save money on closing costs is to comparison shop. Look into other lenders and see if they can offer you a better deal. If you find a lender that charges slightly more interest, but significantly lower closing costs, you might wind up saving money in the end. Do the math to figure out which deal is cheapest.
Some lenders have preferred partners for certain services, such as title insurance, which are rolled into your closing costs. Ask if you can shop around to find another provider at a lower cost.
Negotiate with the lender
If you like your lender and don’t want to shop around with other lenders, try to negotiate. Ask your lender if they can cut you a deal on some of the closing costs. This can be particularly effective if you’re a long-time customer who has other accounts at the bank.
Negotiate with the seller
If you’re in a buyer’s market, try asking the seller whether they would be willing to cover some or all of the closing costs. If the seller is struggling to sell the property, they may cover some closing costs to make sure the deal goes through.
Don’t pay for points
Many lenders let borrowers pay for points, spending money up front to reduce the interest rate of their loan. If you don’t mind dealing with the increased interest rate and correspondingly higher monthly payments, you can save money upfront by not paying for points.
Actually, avoiding points will usually save money overall if you don’t plan to stay for long in your home. For example, let’s say you have a $100k mortgage with a 30-year term. Would it make sense to pay $2,000 (2 points) to lower your interest rate from 5.27% to 5%? As you can see in the table below, it depends. The break-even point would be 7 years. If you stay longer you will save money. Stay less and your points will cost more than what you save in monthly payments.
Close near the end of the month
Lenders will typically make you pre-pay the interest that would accrue on your loan in the time between closing and your first mortgage bill. If you close near the end of the month and receive the bill shortly after, this prepaid interest charge will be lower, slightly reducing the closing costs.
Closing costs are often overlooked, but they’re a major part of the cost of any mortgage. Don’t ignore the opportunity to save some money by reducing your closing costs as much as possible.
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