Even if you haven’t purchased a house, you’ve likely come across the term closing costs. Given that these costs can add up to 5% onto the home’s purchase price, your goal is likely to pay the least amount of them that you have to. When you’re negotiating the sale, your lender is going to give you a loan estimate, or a good faith estimate (GFE). These two terms are used interchangeably. The issue with the fees listed on this estate is that they can be difficult to comprehend. Below are small descriptions of the fees so that you understand what you’re being asked to pay.
Underwriting fees: These fees are the money charged by your lender for the administrative costs associated with creating and processing the mortgage.
Application fee: This fee is the charge associated with reviewing your mortgage loan application.
Credit report fee: This fee is the one that covers the cost of pulling and reviewing your credit report.
Point charge: This fee refers to the amount of money that you may pay for points in order to reduce your interest rate (Tip: always find the lowest interest rate you can. Be sure to shop around).
Title search: This fee covers the cost for the title insurance company to perform a search on the title of the home.
Lender’s title insurance: The cost to insure the title for the lender.
Pest inspection: This is the cost for the home inspection. It lest the lender know that the house has no major pest-related defects.
Home appraisal: This is the cost for the appraiser chosen by the lender to assess the value of the home.
Survey: The assessment of a property that discloses boundary lines, gas lines, roads, walls, easements, and improvements on the property.
Attorney, closing and settlement fees: These fees are legal fees that include the attorneys’ reviewing of documents and agreements, plus escrow fees.
Government recording fee: The fee paid to the government to officially record the change of ownership for the home.
Transfer taxes: This is a government charge based on the amount of the mortgage and the purchase price.
Mortgage insurance Premium: If your down payment is less than twenty-percent and you have an FHA Loan, you will have to pay the mortgage insurance premium.
Escrow property taxes: These are the advance property tax payments that the lender requires, to be held in escrow.
Prepaid daily interest charges: the amount of pro-rated interest that will accrue on the mortgage between the settlement date and the beginning of the first full month of your mortgage.
Mortgage insurance: if you don’t have an FHA loan and your down payment is less than twenty-percent, you will owe what’s called private mortgage insurance.
Prepaid homeowner’s insurance: This is the advance homeowner’s insurance payments that the lender requires before closing.
Rate lock fee: This fee locks in the rate the lender offers you.
Now that you’ve got an understanding of what fees actually go into closing costs, you can see that there are ways to potentially lower this amount. Below are some tips for helping you cut down the amount you’ll owe on closing costs.
Be Sure to Compare Costs
At this point, it’s no secret that closing costs are expensive. Due to this fact, you should do your homework so that you avoid paying more than you have to. This starts with shopping around lenders. Don’t go with the first one you meet with. Find a lender that offers the lowest closing costs; some will actually even match the closing costs from another lender you met with, as they’ll want your business. There are some services included in the closing costs that you are allowed to shop around for. In other words, you don’t have to go with the provider your lender suggests and you can try to find a lower price elsewhere. The closing cost services you can shop for will be listed as such on your loan estimate.
Thoroughly Evaluate the Loan Estimate
Be sure that you aren’t simply skimming the document. You should read each word carefully. Ask questions. Ask what specifically something covers, and why it costs so much. This is a way that you can avoid paying any unnecessary fees that are sometimes hidden in documents. You also are checking for any mistakes, such as accidentally being charged twice.
Be Sure to Negotiate With the Lender
There is room for negotiation in almost anything in life. You never know if you can get a better deal on something until you ask. Try to get any fees you can either excluded, or reduced depending on the nature of the fee. Ask the lender to give you the closing disclosure as soon as they are able to. This form lists a complete detail of each and every closing cost. Again, be sure to check for any mistakes. The lender isn’t as likely to check for mistakes as thoroughly as you would, as they’re not the ones that will end up paying extra due to an accidental charge. At worst, their boss will simply tell them not to do it again.
Ask the Owner if You Can Negotiate the Costs
You should know that some sellers are willing to lower the purchase price of the home in an attempt to get you to buy the house. Most sellers know that closing costs are very expensive, and they will more than likely lower them if it will help you buy the house. This is why it is so important to check the market to see whether or not you have leverage. If no house has sold in their neighborhood in 10 years, they’re going to be more willing to work with you to make the sale.
Remember You Can Always Delay the Closing
Above, we discussed how pre-paid daily insurance charges occur. You can lower those charges by paying the closing at the end of the month. Check the calendar, and plan the closing around the time that you’ll have to pay less. Remember the pre-paid daily insurance charges from the list above? You can minimize those charges by closing at the end of the month. Plan ahead and try to schedule your closing when it means you’ll have to pay less money upfront.
Unfortunately if you want to purchase a home, you can’t avoid closing costs. But do keep this article in mind before you pay more money than you have to for them.