There’s nothing more exciting than buying a home. With today’s historically low-interest rates, more people are stepping into the world of homeownership. Because buying a home is one of the biggest financial decisions you’ll make during your lifetime, you want to be confident every step of the way.
Before purchasing a home, you’ll be required to pay closing costs. This is the final hurdle between you and your new home. What many prospective homebuyers don’t realize is just how expensive closing costs can be.
On average, closing costs run anywhere from 1.5% to 5% of the purchase price. For example, if you’re buying a $400,000 home, closing costs can cost $6,000 up to $24,000.
While you may be tempted to just pay the mortgage closing costs, it’s best to make sure that you’re getting the best deal. Closing costs include dozens of different fees, including:
- Application fee
- Credit report fee
- Loan origination fee
- Lender’s title insurance
- Owner’s title insurance
- Home appraisal
- Attorney, closing, and settlement fees
- Mortgage insurance
That’s a lot of fees and expenses but don’t get overwhelmed! The good news is that there are many ways to lower your closing cost fees.
How to Reduce Your Closing Costs
There are many ways to reduce closing costs, even if by just a few hundred dollars. As a new homeowner, any money that you can save can be used towards furnishing your new home.
Here are some of the best ways to reduce your closing costs so that you pay less when it’s time to finish the deal.
Choose Your Lender Carefully
Just as you shop around for the best deal on a car or a new pair of shoes, you’ll want to do the same when choosing a lender. Don’t settle for the first lender that you come across. Get quotes from various types of lenders, including big banks, credit unions, and local banks.
After submitting a mortgage application, your lender must provide you with a form known as the Loan Estimate. The form provides you with important information, including the estimated interest rate and monthly payment. It indicates if there are any special features to be aware of like penalties for paying off your loan early. The Loan Estimate also provides the total closing costs for the loan.
By comparing Loan Estimates from each lender, you can compare closing costs and other upfront expenses.
Negotiate Your Closing Costs
Despite what many homebuyers may think, closing costs aren’t set in stone. On the first page of the Loan Estimate form, you’ll see the total closing costs and cash needed to close the loan. Under Section C, page 2 there is a section titled “Services You Can Shop For.”
The fees that you can potentially save money on include:
- Home inspection
- Survey
- Title search
- Title insurance binder
- Lender’s title policy
- Settlement agent
While you can choose to shop around for each of these fees, you’ll find the most savings by shopping around for the most expensive services. These include title insurance and settlement services.
While you may not save much by shopping for a less expensive inspector or surveyor, money saved is money you don’t have to bring to closing.
Buy a Less Expensive Home
House hunting can be a stressful and emotional process. Prospective home buyers often start their search before determining how much they need to spend on monthly mortgage payments, making sure that it’s affordable for them as well as what kind of income or resources are available so there will not be any financial obstacles later down the line.
The price of the home you’re buying has a direct impact on closing costs. By purchasing a less expensive home, your closing costs will automatically decrease. If your budget is $400,000, consider looking at homes in the $300,000 to $350,000 price range.
For every $50k you shave off the home value, you may save up to $1,500 in closing costs. When submitting an offer on a home, work with your agent to submit a dollar amount that is not only fair but keeps more money in your pocket.
A less expensive home doesn’t have to mean a smaller home. There are many factors that impact a home’s value, including lot size, age, location, and comparable sales in the area.
Buying a home with a smaller lot or a more suburban location can lower the listing price by tens of thousands of dollars.
Roll Closing Costs Into Your Mortgage
One of the most popular ways to avoid having to pay thousands of dollars at closing is to roll closing costs into your mortgage. This is often known as a no-closing cost mortgage. Don’t let the name fool you. You’re still on the hook to pay closing costs, but you pay them over the life of the loan versus upfront.
This type of mortgage loan saves you money upfront but will increase your monthly mortgage payment. Because you pay interest on closing costs, you’ll also pay more over the loan term.
For homebuyers who cannot afford closing costs, a no-closing cost mortgage is a great option. If you have the funds available, paying closing costs upfront makes more sense financially, as it will save you money in the long run.
End of the Month Closing
Timing is everything, especially when it comes to buying a home. You can pay less per diem (prepaid) interest between loan closing if you sign towards the end of the month. To find out how much you can save, multiply the loan amount by your interest rate.
For example, let’s say your loan amount is $300,000 and your interest rate is 3%. To calculate your per diem interest, you’ll multiply 300,000 times .03, which equals $9,000. You then divide that number by 360 to calculate the daily interest charge, which is $25 in this scenario.
Take that number and multiply it by the number of days left in the month plus the first day of the following month. If your loan is closed near the end of the month, the amount due is much lower.
Ask About Discounts and Rebates
The competition for mortgage business is fierce, which works in your favor as a buyer. Lenders are more willing than ever to get and keep your business, which means they will go to great lengths to be your mortgage loan provider. But a lender isn’t going to offer discounts without you asking first.
Work with your lender to see if any of the closing costs can be waived. Some lenders will waive or reduce the fees, while others may pay them for you. It never hurts to ask!
Ask the Seller to Contribute
Depending on the market, the home, and the situation at hand, a seller may be willing to contribute money towards your closing costs. You’re more likely to see this offered when a seller is looking to sell quickly or if the home isn’t in the best condition.
In today’s market, you’re less likely to see sellers making too many sessions. This is because inventory is low and buyers are aggressively competing to submit the winning bid for a home.
Once the market cools down and tilts more towards a buyer’s market, you’re more likely to find a seller who is willing to contribute towards your closing costs.
Additional Read: Top Creative Tips For Paying Closing Cost Credits
Contact A and N Mortgage for More Information
Everyone wants their own part of the American dream. If you’re in the early stages of finding your dream home, there’s no better lender to work with than A and N Mortgage. We make the closing cost process a breeze and work with all of our customers to lower upfront expenses as much as possible.
When you’re ready to apply, our team is here to help. One of our mortgage experts will guide you through the online application. You can get preapproved for a home loan in a matter of days! We can also help you decide which type of loan best meets your needs.
Your dream home is waiting! Contact the team at A and N Mortgage to start your journey to earning the title of being a homeowner!
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.
