What are closing costs and how can I reduce them?

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What are closing costs and how can I avoid themmtg-closing-costs-header-blogWhen you’re planning on buying your first home, you’ve probably considered the amount you need to save up for your down payment, but that may not be all you need to pay. To finalize your home purchase, there will be a variety of closing costs required to finalize the deal.

Though the specifics will vary on where you live, who your lender is, and the type of deal you’re making to purchase the property, closing costs may include legal fees, title fees, recording fees, survey fees, appraisal fees, inspection fees, taxes, and commission for the real estate agents involved. You may also owe your lender for escrow, underwriting or application fees for your loan, and points which you pay in exchange for a lower interest rate.

How much should I expect to pay in closing costs?

Typically, your total closing costs will range from 2 to 5% of the purchase price; which is no small amount, especially if you’re already saving to afford a 20% down payment. To get a better idea of what your closing costs will be, you should talk to your lender,  and provide them your information. They are then required to give you a good faith estimate of what the closing costs for your property may be.

Just before you close on your home, you should receive a HUD-1 settlement statement with precise information on what closing costs you’ll be paying, which can vary from the estimate you received previously.

Though these extra fees may seem onerous, you should bear them in mind before you start house-hunting, remembering that you’ll be tacking on additional costs to the purchase price of any home. By remembering the closing costs that will be added to the final price, you can make sure you find a home that’s not going to be an immediate financial burden.

However, if you’ve found the perfect place and closing costs are looming, don’t panic because there are a number of ways around them.

Shop around for a loan

Like making any big purchase, you should shop around for the best deal before you choose your lender. Some lenders will have higher closing cost fees, while others will have fewer closing cost fees. You may even find some lenders who are willing to waive closing costs entirely; though you’ll want to do the math to be sure the loan on offer is still a good deal over time.

Another option is to skip paying for points on a mortgage. While this may seem like a good deal to lower your interest rate over time, if you cannot afford the up-front payment, it may not do you much good. Again, if you’re considering this option, weigh how long you’re likely to stay in the home, and do the math (before you make your final decision.

Negotiate with the seller

Though some closing costs are traditionally paid by the seller and others are traditionally paid by the buyer, you can always make an offer to the seller that stipulates they’ll pay some or all of the closing costs. You may wind up paying more for the house in this situation. That may be easier to deal with than a large up-front bill for closing costs.

If you’re making a good offer on the home, the seller can reasonably be expected to chip in with some of these costs. However, in a competitive market where other buyers are interested in the property, you may find this will result in your offer being rejected in favor of another. In this situation, if you don’t have the cash to pay closing costs, your best bet is to be patient.

Even if you don’t get the first home you want, you’ll eventually find a property where both you and the seller can come to an arrangement that works.

Look for promotional offers that waive closing costs

Shop around for the best pricing and rate combination. Some mortgage lenders may even run promotional offers that waive some, or all, of the closing cost fees.

Posted in: Mortgages & Home Buying, Personal Finance
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