The Best Ways to Avoid Closing Costs as a Buyer
Closing costs are necessary for anyone buying a home with a mortgage, whether it's their first time or not. These costs, which cover various fees paid to third parties to facilitate the sale, usually range from 2% to 7% of the home's purchase price. For example, on a $250,000 home, closing costs can range from $5,000 to $17,500.
Understanding what closing costs are is just the beginning. It's important to know why they're so high, who pays them, and how to reduce or waive them. Both homebuyers and home sellers are responsible for paying closing costs. Still, the bulk of the expenses typically falls on the buyer's side, including fees for mortgage origination, taxes, and credit assessment.
Negotiating some of these costs is possible, but not all fees are negotiable.
Who pays closing costs and Realtor fees, and when?
After going through the process of saving money for a down payment, getting pre-approved for a mortgage, and finally finding a new home, it can be discouraging for buyers to learn that there are additional expenses they need to cover.
However, buyers and sellers usually contribute to the closing costs, although buyers usually pay more (around 3-4% of the home's price) than sellers (1-3%).
While some fees, such as the home inspection fee, are paid upfront, and others, like property taxes and homeowners insurance, are recurring, most closing costs are paid at the end when the home is officially sold, and the keys are exchanged.
How much can buyers expect to pay?
Homebuyers are typically responsible for most closing costs when purchasing a property with a mortgage. These fees are associated with third-party services that facilitate the sale of a home and can range from 2% to 7% of the purchase price, which means that for a $250,000 home, closing costs can be anywhere from $5,000 to $17,500.
Here are some of the costs that buyers can expect to pay:
- A loan origination fee, which covers the processing of paperwork for the mortgage.
- A credit report fee.
- An underwriting and credit assessment fee.
- An appraisal fee to assess the value of the home.
- A home inspection fee for identifying potential issues with the property.
- A title search fee to ensure there are no liens on the property and title insurance to protect against claims.
- A survey fee for single-family homes or townhomes (not for condos).
- Taxes or stamp taxes on borrowed money.
- Private mortgage insurance if the down payment is less than 20% of the purchase price.
- The lender pays the discount or mortgage points for a lower interest rate.
- One-time fees for document recording, attorney fees, and real estate agent commissions.
In addition to these costs, buyers should also budget for an escrow deposit, covering typically two months of prepaid property taxes and mortgage insurance payments, managed by a neutral third-party escrow officer.
How much can sellers expect to pay?
Regarding closing costs for sellers, there are a few expenses they can expect to pay. These include a closing fee, which is paid to the title insurance company or attorney's office where the home sale is finalized, as well as taxes on the sale of the home.
If the seller has an attorney, they may also be responsible for paying their fees. Additionally, there is a fee for transferring the title to the new owner.
While these costs may seem relatively small compared to what buyers have to pay, it's important to note that sellers are typically responsible for paying real estate agent's commissions. These commissions can range from 4% to 7% of the home's sales price, so sellers should expect to pay significant fees during the closing process.
How To Avoid Closing Costs When Buying A House
While it may not be possible to avoid closing costs when buying a house completely, some ways exist to reduce or even eliminate them. Here are some strategies that can help you save money on closing costs:
Negotiate with the seller
You can ask the seller to pay for some or all of your closing costs. This may not be feasible in a competitive real estate market, but it's always worth asking.
Shop around for lenders
Different lenders charge different fees and interest rates. You can compare loan estimates from different lenders and choose the one with the lowest closing costs.
Get a no-closing-cost mortgage
Some lenders offer a no-closing-cost mortgage, which means they pay the closing costs in exchange for a slightly higher interest rate. This can be a good option if you don't have enough cash to pay for closing costs upfront.
Look for closing cost discounts
Some lenders offer loyalty programs or discounts on closing costs to repeat customers or members of certain organizations, such as the military or first responders.
Ask for a closing cost credit
You can ask the lender for a closing cost credit, which is a rebate that reduces your closing costs. This can be a good option if you have enough cash to pay for closing costs upfront but would prefer to keep the cash on hand for other expenses.
Schedule your closing for the end of the month
Closing at the end of the month can reduce closing costs since you'll pay per diem interest for fewer days.
Avoid mortgage insurance
If you can make a down payment of at least 20%, you can avoid paying for private mortgage insurance (PMI), which protects the lender if you default on the loan.
Choose the right loan program
Some loan programs, such as FHA and VA loans, have lower closing costs than conventional loans. You can also choose a mortgage program that offers a lower interest rate, which can reduce your monthly mortgage payment and the amount of interest you pay over the life of the loan.
Work with a real estate agent
A real estate agent can help you negotiate with the seller and find lenders who offer lower closing costs. They can also guide you through the closing process and ensure you don't miss any important steps.
Take advantage of military benefits
Military members have closing-cost benefits that are often overlooked. Service members and veterans may qualify for funds to help them purchase a home.
Consider union membership
AFL-CIO members can get help purchasing or refinancing a home with closing-cost discounts and rebates from the Union Plus Mortgage program.
How to estimate closing costs
If you want to get a rough estimate of your closing costs, you can use an online closing cost calculator or seek help from your real estate agent, lender, or mortgage broker for a more accurate estimate.
However, the lender is required by federal law to provide buyers with a closing disclosure at least three days before the closing date, outlining the final costs. Similarly, sellers should receive similar documents from their real estate agent outlining their costs.
It's essential to carefully review these documents before closing to ensure the numbers are accurate and align with what you originally quoted. Mistakes can happen, so it's crucial to double-check the numbers to avoid any surprises on the closing day.