When buying a home, you'll need to consider how much cold, hard cash you'll need to cover the down payment as well as closing costs. Closing costs are fees associated with a home purchase that are paid at closing.*
Since closing costs can run an additional $5,000 to $10,000 on top of your cash down payment, you will probably want know what those closing costs will include. It may take some work, but it will be worth in the end when you avoid spending unnecessary money.
Here are eight tips for how you can reduce your closing costs:
1. Shop around for lenders
Most lenders will volunteer their menu of products and corresponding interest rates, and many will provide an estimate for closing costs if you ask for one. Once you have a handful of estimates, compare the costs.
Tip: If you have a good credit score then going to a bank or mortgage lender directly may be a better option.
2. Reduce fees not performed by 3rd parties
Third party costs include the title search, appraisal, attorney's fees, credit report and title insurance. There is usually very little variation in these charges among mortgage companies and lenders because these costs reflect actual costs that are incurred. Fees for services not performed by third parties, however, such as courier, express mail and other administrative services, typically have room for cost reductions.
3. Go for a zero-point option or reducing points
Paying points may help reduce your interest rate. (Each point is one percent of the loan amount.) Although, if you are short of money for closing costs, then you could consider paying for lesser or no points. This depends on the mortgage you select and your financial situation.
Tip: Consider reducing the points and instead adding to the down payment. This way you will be reducing the loan balance and get better rates and terms with a higher down payment.
4. Close later in the month
Lenders usually collect interest for the current month at closing, so if you close later in the month, the lender will only collect a few days of interest, reducing your closing costs and saving you some money. This is effective especially if your loan balance and interest rate is high.
5. Negotiate with the home sellers
Another way to cut back is to ask the home sellers to credit you money to pay for some of your closing costs. When you ask sellers to do this, however, take into account that you are asking them to accept less for their home.
6. Shop around for mortgage brokers
Mortgage broker fees depend on what the loan officer wants to charge (nowadays up to five percent). Mortgage brokers earn commissions in exchange for bringing borrowers and lenders together. Usually, the broker's commission is paid indirectly by the buyer, in the form of closing costs or additional loan points. Shop around for the best rate, and ask your Realtor for recommendations.
7. Talk to your Realtor®
Realtors also ask for an average of a four to six percent commission in exchange for their services. Keep in mind that many Realtors will ask which services to reduce if they were to reduce their commission rate. Regardless of whether they negotiate with you, asking your Realtor may also present several other options for how you can cut back on closing costs.
8. Beware of "junk" or "garbage" fees These fees are the excessive processing and documentation fees for settlement costs, underwriting fees and application fees, which might be little more than alternative names for the same services you're already paying for.
Saving a little here and a little there could end up making a big difference. Doing some research, paying attention to small details, asking for reductions, and speaking to your Realtor before you sign on the dotted line could save you hundreds of dollars. It may not be likely you'll be able to bring down your closing costs to zero but it is possible to reduce the overall amount.
You might also like: "Closing Costs - The Who and The What"
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