How Can I Prepare for Negotiating Closing Costs

How can I save money on closing costs?- Must Follow Tips

When you have found your dream home, finalised the agreed price with the seller, and secured a commitment from the lender for a mortgage, some issues may still concern you, like accumulating expenses, especially the closing cost.

The closing cost depends on various factors, like the price of your home and where you are buying it. The lender ultimately imposes this cost on other service providers, which can increase rapidly. The closing cost may range between 2% and 4% of the total home price. The national average closing cost for a single-family home in 2021 was $6905, including taxes. 

The good part of closing costs is that you can save a lot. If you want to negotiate closing costs, here are a few ways to talk about.

Key Highlights

  1. Closing cost is a fee you pay at the end of a real estate transaction on the property's purchase price.

  2. Whether you are a buyer or a seller, you can incur these closing costs.

  3. The closing cost includes fees for initiating and evaluating the mortgage, real estate commission, taxes, insurance, and record filing.

Top Tips for Negotiating Closing Costs - Save More

1. Shop around from your loan estimate

When you apply for a loan, the lender must give you a loan estimate form within three days to complete the mortgage application. This form includes all the costs, such as the loan amount, interest rate, and monthly payment. You can even get it earlier, so ask for it.

On page two of the form, you will find a section called “Services you can shop for”. This section includes pest inspection, a survey and fees for the title search, settlement agent and insurance binder. The vendors listed on the form might be your lender's preferred vendors. You can even search for other options to reduce the cost. If you opt for a vendor picked by your lender, then their price doesn't change for more than 10% from the first quote. If you choose a vendor on your own and change their price before closing, you will have to cover the increase, no matter how big. 

Additionally, if you are buying a home, note that the seller or seller's real estate agent might be the one who chooses the title and screw provider. If you want a new service vendor, you must negotiate the purchase agreement with the seller rather than your mortgage lender.

2. Pay attention to the fees charged by our lender

Be sure about the fees your lender is charging you. These may include various loan-related costs like origination and underwriting fees. You don't have the right to avoid these costs entirely, but you can enquire if your lender is willing to reduce them. It is always good to seek a discount. 

You can also explore other offers from different lenders. It is good to obtain estimates from various lenders before submitting your application. Try to get this loan estimate form on the same day for more accuracy and comparison, as prices frequently change.

3. Understand what the seller pays

It is beneficial to understand the closing cost the seller is responsible for. The buyer covers certain expenses. However, the seller must pay the other ones, and the most significant one includes the real estate agent commission. 

You can request the seller to contribute and cover some of your costs, which would be noted as the seller's credit on the loan estimate form. This is good in a sellers' market where sellers have more negotiating power, but it's a common practice to inquire. A study conducted by Redfin in 2023 revealed that 45% of home sellers provide some concessions to their buyers. If you want to stand here, try to understand what prices apply to the seller.

4. Go for no closing cost option

You can check out the option of a no-closing-cost loan some lenders offer. Opting for this option means you won't have to pay upfront costs during the closing process, but it often comes with the trade-off of a higher interest rate. This strategy saves you money initially, but you end up paying more in the long run because the lender includes this cost in your loan with a higher interest rate.

5. Try to pay at the end of the month.

Paying the closing cost of your home loan at the end of the month is a good option if you want to reduce your closing cost. If you are a cost-conscious buyer and want to save, choose to pay it at the end of the month. 

Mortgage payments are typically due on the first of each month. When you pay a portion of the mortgage at closing, you cover the days from the closing date to the first of the month—the less time remaining in the month, the more cost-effective your payments. Since mortgage interest is calculated daily, you will have fever days to factor into your closing cost if you close later in the month. This process may be a bit more intricate, but if you are up to closing it at the end of the month, it becomes more economical for you.

6. Get first-time home buyer assistance for closing costs.

Many states in the US offer assistance for closing costs for first-time home buyers or even those who are not. This assistance comes in various forms, including a soft or quiet second mortgage that stays with your home, and you only need to repay when you sell. Various programs have terms to forgive the second mortgage if you remain in the house for a specific number of years, which typically turns it into a grant.

However, you may need to be cautious about qualifying for these first-time home-by-resistance programs, as they may only cover some of your closing costs and significantly impact your financial situation. If you are facing a budget crunch but are determined to purchase a home, these programs can help you make a considerable difference on closing day.

7. Ask your seller to pay

If you are having trouble paying closing costs and the down payment, you can ask the seller to cover your closing costs. This is legally permissible and accepted by most mortgage programs, but it comes with a certain percentage of the property's price. However, your future home must increase enough to cover the seller's desired cash-out amount plus the additional closing cost integrated into the loan.

This method may be costlier in the long term due to occurring interest, but it can be a suitable solution if you are in a difficult financial situation. It is also important to note that asking your seller to pay the closing cost may not be good in a competitive market, but it could work well in a less competitive one.

8. Don’t fall for optional points

When it comes to your mortgage, you can buy different kinds of points. Summer is mandatory, while others, like discount points, are optional. Discount points include paying a few to lower your interest rate on your home. Each point or fraction of a point reduces your interest rate by some percentage in accordance with your lender's policies.

In the beginning, this idea may be tempting and entice you to go for these discounted options, but it is also important to note that it takes several years to pay. On the other hand, you might spend more money upfront to cover this point. If you are already facing financial challenges, it is good to skip buying these points and consider refinancing later if interest rates come in your favour.

9. Consider lowering the down payment

Consider making a smaller down payment if your closing cost is too expensive. If you initially planned a 5% down payment on your mortgage, you might reduce it to 3%. This will give you more cash to cover your closing costs. However, it is also important to note that if you opt for a smaller down payment, you will ultimately pay higher interest on your mortgage principal. Eventually, you will pay more or the entire life of the loan.

Final Words

Closing costs can be quite expensive, but numerous ways exist to minimise the financial burden on this important day. Preparing for mortgage closing costs in advance will help you avoid sudden shocks when you see the final figure. It is advisable to never settle for the first cost estimate from your lender and take more initiative to compare expenses from different lenders. Negotiation can help you reduce certain costs. Before you go for any strategies to reduce the closing cost, it is good to comprehend the associated risk.

Also Read: 

  1. Average House Prices in USA

  2. What is a Warranty Deed

  3. How to Buy House with LLC

03 Feb, 2024

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