How to save on closing costs

When buying a home, you have two major costs, down payment and closing costs.  Everyone understands down payment, but closing costs confuse many people, and they can be pretty expensive.

So what are closing costs?

Closing costs are the fees for services for everything involved in buying a home. No one works for free, and many people are involved with you getting a mortgage loan. They include mortgage lender fees, appraisal, credit reports, title company, title insurance, county taxes, state deed taxes, mortgage recording fees, and more. You also have additional costs known as escrow or pre-paid items, which is buying your first years homeowners insurance, and a one time pro-ration of property taxes depending on how much the homes taxes are, when taxes are due in your area, and what month of the year you are buying the house.

Who pays the closing costs?

The buyer always does. But there are multiple ways to pay. Cash out of pocket, rolled into the transaction through either a higher interest rate or a higher purchase price, or a combination of all of these.

How much are closing costs?

You will see many people say closing costs are typically you'll see people say 2% - 5%. This has never ever been a true rule of thumb because there are so many variables. Loan type, loan amount, property type, local customs, and the buyers choice of interest rate, and how to pay. Less expensive homes will tend to be a higher percentage, while more expensive homes will be a smaller percentage.

For example, just the appraisal alone will typically be around $500 regardless if you buy a $50,000 home or a $500,000 home, as the appraiser does the same amount of work for each. But $500 on a $50,000 is 1% all by itself, while on a $500,000 home, it is 0.1%.

Only with a discussion with your Loan Officer can you determine closing costs.

How can I save on closing costs?

Studies show that the closing costs are always more costly than many buyers expect, especially first time home buyers. But there are some ways to lower your costs, or out-of-pocket costs, including:

The most popular way is to negotiate with the seller to have the seller pay your closing costs. This sounds great, and it is in the fact that you've reduced your out-of-pocket expense needed today to buy a home.

But understand it isn't free. For example, let us assume the seller is asking for $200,000 for the home, and you'd like them to pay $6,000. If the seller says yes to that, it sounds like you just saved $6,000. The reality is the seller just accepted $194,000 in their pocket, and you financed $6,000 in the loan with a $200,000 offer.

Another common example would be the seller wants $200,000 for the home, and you'd like them to pay $6,000 of your closing costs, so you negotiate a sales price of $206,000.  Again, you are financing the closing costs, but both of these options are super popular because it reduces your immediate need for that money today at closing.

Discuss with your Loan Officer lower cost loan options. All lenders can and will offer lower closing costs options in exchange for a higher interest rate. From no discount points, and no loan origination fees, all the way down to no closing costs whatsoever. Small reductions in closing costs will equal small interest rate increases, while large closing cost reductions will mean larger interest rates increases.

No one likes a little higher interest rate, or a higher loan amount, but these very popular options simply allow you to exchanging cash needed to buy the home today with paying for it a little bit over time.