Are you on the hunt for a new property? Congratulations! Buying a home represents an exciting milestone in many people’s lives. Before you rush into a deal, the smart approach is to strategize ways to minimize closing costs before you get to the closing table. Negotiation in the early stages of a home purchase is key.
Closing costs are any expenses that must be covered before finalizing a purchase and apply to both buyers and sellers. They are generally paid to compensate the parties responsible for approving, funding, and insuring a transaction, and are not included in a property’s list price. In this way, it is a smart idea for buyers to calculate potential closing costs before you begin the buying process.
Fortunately, closing costs are not fixed, and you could maximize your savings if you follow some simple strategies. To help you make the most of your budget and secure the home of your dreams, we’ve put together some top tips for paying closing costs that you may not have considered.
What fees make up your closing costs?
The closing costs required to purchase a home can differ from buyer to buyer and depend on factors such as the type of mortgage taken out and the willingness of sellers to cover certain expenses. Generally speaking, however, closing costs can be split up into two categories: those associated with securing a loan and buying a property and those associated with owning the property.
Fees charged by lenders and other third parties tend to cover processing costs and compensation for administrative work. You may also choose to pay for building inspections and appraisals if the seller is unwilling to do so themselves.
Closing costs involved with homeownership, on the other hand, include property tax, homeowner’s insurance, homeowner’s association dues, and any other financial products related to your mortgage.
How are closing costs calculated?
The total sum of your closing costs will depend on several factors such as the terms of your loan contract, how many third-party fees you are required to pay, the cost of property tax in your local area, your income, and the value of your new property. Homeowner’s insurance, for example, can differ significantly depending on the company you opt for and the value of your home, while property taxes are organized by local governments and adjusted in line with income.
Some fees are set in stone, while others are subject to slight changes depending on factors such as how many days’ worth of property taxes you need to pay. It is possible to work out a reliable estimate of the closing costs of buying a property, however, and your lender will provide you with their estimate soon after you have filled out a loan application.
On average, closing costs hover between 2% – 5% of the purchase price of a property. This is a substantial chunk of money, particularly if you’re working with a tight budget or buying your first home. Fortunately, however, it is possible to minimize your closing costs with a little research and perseverance.
Tips for minimizing closing costs
There is no one route to buying a new home, and there are many ways to navigate the lending system. Here are just a few options to consider if you’re looking to keep your closing costs low while still securing the home of your dreams:
1. Pay closing costs beforehand
It is possible to pay all closing costs upfront during your closing appointment using a cashier’s check. This may be a suitable option if you’re hoping to keep your mortgage repayments as low as possible and keep your loan rate stable. However, if you’re already working with a tight budget, this money may be better spent on furnishings for your new home or covering the costs of moving.
2. Roll costs into your mortgage loan
For most loan types (other than VA loans), you can roll closing costs into your overall mortgage loan, meaning you won’t have to pay a large chunk of money upfront when settling your contract. This may be useful if you’re a first-time buyer and anticipate making more money in the future. However, it will increase the cost of monthly payments and impact your loan-to-value ratio, potentially limiting your financial freedom in the future.
3. Choose a no-closing-cost mortgage
Many lenders offer to pay closing costs, including on FHA and VA loans. This is a good option if you do not have the funds to pay any upfront fees at the time of your closing appointment. It will not increase your loan, but it could significantly push up the interest rate, meaning higher monthly payments.
4. Shop around for a decent loan
Before you decide on a lender, it makes sense to request several loan estimates from a range of lending institutions. This will allow you to weigh up your options and find a deal that works for you. Loan terms can vary significantly between lenders, so you may find one that offers an obvious advantage based on your circumstances. However, remember to read the small print of any loan contract and only work with lenders you feel you can trust.
5. Don’t be afraid to negotiate
Depending on the health of the real estate market, a seller may agree to offer closing cost assistance, particularly if they are hoping to close a deal quickly. Most types of loans allow sellers to hand over a certain percentage of the property’s sale price as a closing cost credit, thereby reducing the financial burden on the buyer.
If you decide to pursue this route, it’s important to seek advice from your lender. The amount of money a seller can contribute will depend on the terms of your loan. If you discover that your lender is unable to facilitate closing cost credits from a seller, you could simply ask the seller to lower the price of the home to offset expensive closing costs. This is worth a try if you love the property in question and your budget falls just slightly short of the asking price.
6. Research your insurance options
Homeowners insurance plans can vary widely, with some requiring buyers to pay a significant portion of the premium at closing. If you’re keen to save on closing costs, you may wish to select an insurance policy at the cheaper end of the scale. Keep in mind, however, that you tend to get what you pay for when it comes to insurance, and purchasing suboptimal coverage could leave you out-of-pocket in future.
7. Get help from your employer
If your employer offers a home-buying assistance program, you may be able to use company funds to cover your closing costs. Most lenders allow buyers to utilize employer assistance – you simply need to provide official documentation to demonstrate your eligibility.
8. Take advantage of your military status
Military workers, veterans, and their family members are eligible for VA loans – mortgage programs that offer zero percent minimum down payment requirements. On top of this, many VA loans help with closing costs, so research your options carefully before making a purchase.
9. Use gifts from relatives
Most loan programs allow buyers to utilize gifted money to cover closing costs, provided that the funds are not borrowed. To prove that the money has been gifted, and you will not have to pay it back, most lenders ask for documentation such as a letter from the donor. You will also need to provide evidence of where the funds originated.
10. Use funds from your 401K
Some 401K plans allow buyers to borrow funds for the sole purpose of purchasing a new home. Of course, the viability of this option will depend on the terms of your program and must be approved by your plan director. You will need to reach out to your HR department to ascertain whether you are eligible and for a full list of repayment terms. Be aware that some repayment terms are very strict and could incur penalties if breached.
Additional Read: Everything You Need To Know About Closing Cost Credits
Reach Out to A and N Mortgage for Help
As you can see, there is no single way to pay off your closing costs. Finding the best deal for your circumstances will require a little time, research, and creativity. From researching lenders to making the most of special assistance programs, there are plenty of ways to lower the costs of closing and get one step closer to owning the property of your dreams.
If that sounds a little daunting, stressful, or time-consuming, you don’t have to go it alone. A and N Mortgage can help you navigate the complicated world of homeownership and make the most of your budget. Contact us today to speak to one of our skilled and knowledgeable mortgage consultants!
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.