What are closing costs?
It's important to understand the role closing costs play in your mortgage—especially because we're not talking about a measly amount. Closing costs can range from 2–6% of the total cost of your loan. So, on a $250,000 loan, that's $5,000–$15,000. Having to come up with that amount of money after scrimping and saving for a down payment can be a crushing blow.
"The term ‘closing costs' includes a variety of expenses above the purchase price of your property, such as fees for a title search, title insurance, taxes, lender costs and some upfront housing expenses such as homeowners insurance," said U.S. News & World Report.
Shop around
There are a number of items on a loan estimate that can vary in cost depending on the lender. It helps you to reach out to more than one to find the best option. And remember this: You may think the winner is the one who is offering the lowest rate, but that's not always the case. It could be that some of the fees are higher with another lender, making the loan less attractive.
Compare your loan estimates
Lenders are required to provide you with an itemized, three-page Loan Estimate form within three business days from the date you apply for a mortgage. So now it's time to compare and contrast your estimates.
"The Loan Estimate lets you comparison shop between companies' total costs and also dig into specific fees once you've chosen a lender," said NerdWallet. "You need the legally binding Loan Estimate to compare costs, not the ‘closing costs worksheet' or a ‘fee itemization' that some lenders offer," Erik Martin, president of Total Mortgage, a national mortgage company based in Milford, Connecticut, told them.
Know what you can negotiate
Page 2 of the Loan Estimate has a section called "services you can shop for," said Bankrate. It includes the pest inspection, survey, and "title fees, like title search, insurance binder, and settlement agent. These are services you can find on your own or use what the lender provides. If you shop around, you might be able to find something cheaper."
And then there are the lender fees. "Lender fees are fees charged by banks and other financial institutions for processing and funding a loan," said LendingTree. "They can include application fees, attorney fees, recording fees, underwriting fees and more." While you may not be able to eliminate these fees, you may be able to negotiate with the lender to lower them.
Close late in the month
Can you control the date of your closing? This is something to discuss with your lender, because there are potential savings for a late-in-the-month closing. "Prepaid interest is one of the fees that come into play when buying or refinancing a home," said HSH. "Closing toward the end of the month can save on prepaid interest. For example, if you close on July 11, you'll have to pay for 20 days of interest. On a $200,000 loan with a 4.5% mortgage rate, that's almost $500. By closing on July 30, you'll only pay interest for July 30 and 31. Using the same loan amount and interest rate, two days of interest is only $49."
Ask for the seller to pay your closing costs
There is no requirement that states that the buyer has to be the one who pays the closing costs. It may be possible, depending on the type of market you're in, to get the seller to pay at least part of the costs.
Some loans also allow you to roll part or all of the closing costs into your mortgage, which will raise your monthly payment some, but save you from having to come out of pocket.
Other things to look out for
Certain type of loans will have separate costs involved like an upfront mortgage insurance premium of 1.75% for FHA loans or a VA funding fee as high as 3.6%. These are not negotiable fees, but they may help you determine which loan is right for you and how much of a down payment you want to come up with. Remember that, for FHA and most conventional loans, you will also pay a monthly mortgage insurance premium.
Want to take the conversation further? I'd love to connect you with a lender partner who can explain this more in-depth and get you pre-qualified.
With gratitude,
Miriam
