It’s no secret that homebuying can be an expensive process. On top of the house itself, you’ll likely need funds to cover things like closing costs. However--if you go into the process with a little knowledge, there are ways to bring those costs down!
Whether you are buying a new home or refinancing the one you’re already in, don’t let closing costs come as a surprise when it’s time to sign on the dotted line. Here’s a breakdown of what you can expect to pay and how to save on your closing costs.
What are closing costs?
The first key to saving is knowing what to expect. Here are some items typically included in closing costs.
Your lender will charge a set of fees for all of the things they do to process, approve, and fund your mortgage.
A common lender fee is the loan origination or underwriting fee. ”
A common lender fee is the loan origination or underwriting fee. This covers the administrative costs associated with processing your loan application and determining the risk involved in lending you money.
These fees are charged by third parties but are still necessary parts of the mortgage process.
- Appraisal fees: A professional appraisal is a must to determine the fair market value of the home you are buying or refinancing. The appraiser will consider the condition of the home and upgrades or amenities, as well as the location and recent similar home sales in the area to come up with the value of the property.
- Attorney’s fees: The services of a lawyer are needed to draw up the closing documents and there will be a fee charged for this service.
- Title fees: The title company oversees your closing as an independent entity and charges a fee for this service. You’ll also likely have at least one title insurance fee.
- Inspection fees: Your lender will want to make sure there are no major defects in the house before closing.
- Courier fee: Depending on where you live, there might be additional charges for courier fees to deliver the documents to the courthouse.
- Recording fee: There may also be fees to record the transaction with the county.
This is by no means an exhaustive list of fees that you may face, just the most common ones that most borrowers will see.
Escrow fees, also known as prepaid fees, are required by lenders and go into an escrow account. These initial fees will start the accounts used to pay your monthly homeowners insurance and quarterly property taxes. The funds will be stored in your escrow account until the insurance and tax bills are due.
You’ll also pay some mortgage interest as a prepaid fee. This won’t go into the escrow account but will cover the prorated interest on your mortgage that accrues between the settlement date and the first full month of your loan.
Who pays closing costs?
Typically, the buyer pays the closing costs associated with financing and the property, but this isn’t always the case. The expenses can actually be paid by any party, as long as it’s outlined in the purchase agreement. Negotiating this is key to saving, and we’ll talk more about negotiating closing costs in a bit.
How to Save on Closing Costs
Here are five ways to cut your expenses when you close on your home mortgage.
1. Compare Lenders
Closing costs are not the same across all lenders. Charges will vary from lender to lender, as do the way that they charge. For instance, some lenders charge a flat rate, while others charge a percentage of the cost of the mortgage. Depending on the cost of your home, the difference between the two methods could cost or save you.
Because of this, it’s always a good idea to shop around and compare the costs from a few different places. It’s also important to go through the loan estimate carefully. Ask the lender about each item and what it covers. This can help you identify unnecessary or padded costs.
2. See What Services You Can Shop For
Your lender will break down the closing costs on your loan estimate into two categories: services that you can shop for and services that you cannot shop for. There will be prices listed out next to the services that you can shop for, but these are the fees for the lender’s vendors. You are free to go out and ask for estimates from other companies that perform the same services.
Shopping for your own services like survey, pest inspection, and title search can save you hundreds if you find people who can do it for less than the bank’s preferred vendors can do it for. Do a little research about the vendors in your area and see if you can find a more affordable option.
3. Negotiate with the Seller
If you are lucky enough to be house-hunting in a buyer’s market, getting a motivated seller to cover some or all of the closing costs is not unheard of. Even if they don’t cover all of the cost, they may agree to cover some of the third-party fees like inspections and appraisals. Always try to negotiate this— you never know what savings you’ll get unless you try!
4. Negotiate with the Lender
Closing costs are not set in stone. Be sure to sit down with your lender and go through the loan estimate and closing disclosure before signing. You’re not going to avoid paying some lender fees, but you’ll know exactly what you’re being charged. If there are fees you don’t understand—ask questions!
5. Close Later in the Month
Remember how we mentioned that you’ll have to prepay on your mortgage interest? One easy way to save money on your closing costs is to close at the end of the month. The number of days left in the month after closing determines the per diem interest you pay. If you close later in the month, there are fewer days for interest accrual, therefore a much smaller fee wrapped into your closing costs.
Start Saving on Your Closing Costs
Closing costs are usually unavoidable, but don’t overlook the different ways to cut your costs. Remember, savings won’t come to you unless you seek it out. Never be afraid to negotiate or ask about discounts. You might be surprised at what you can save!