Closing costs. Even the best home mortgages have them, and it can seem like they never end. It’s totally understandable if you think there might be an actual kitchen sink somewhere on the list.
However, while it’s no fun coming up with an additional 2-5% of the purchase price of your home, closing costs play an important part in protecting you.
Let’s review some of their ins and outs. What they are, what they do, and whether there’s some wiggle room in lowering them.
What Are Closing Costs?
Closing costs are the varied and many fees covering the administrative, legal, protective, and governmental efforts involved in transferring ownership of a property from seller to buyer.
When you submit your loan application, by law, the lender has to include an estimate of your loan and the closing costs within three business days.
About three days before your close date, you’ll receive a “closing disclosure” which will have more exact information about your loan and closing costs.
The law limits how much the fees can go up from the initial estimate to the final disclosure. If you feel they’ve gone up too much and perhaps some ill intent is afoot, you are free to walk away from the deal.
Types of Closing Costs
- Title fees: Almost three-fourths of your closing costs will be in this category. Title fees include title searches, title insurance, and settlement services. This last has the most potential for variability so be sure you know what you’re paying for.Lenders require title insurance, but as a future owner, you should also consider owner’s title insurance. Both will protect you if someone has, or claims to have, an ownership stake in your new home, and also if there is an undisclosed lien on the property.
- Lender fees: Also called “origination fees,” they may be presented as an all-in-one cost or broken out into specific charges such as credit checks, transfer taxes, certifications, processing, and administrative fees, etc.
- Prepaid costs: These include funds to pay for homeowners insurance and property taxes. The amounts are typically equal to one year for the former and two-six months for the latter.
How to Reduce Closing Costs
Seller-Paid Costs: Except for the realtor’s fee, most closing costs are paid by the buyer. However, depending on market conditions and the seller’s particular situation, you may be able to negotiate to have the seller pay some or all of them.
Another option is to ask the seller to raise the sale price of the property to exactly cover the closing costs. The seller would then return the extra money to you to cover the closing costs.
You would still have to pay the fees, but it would get folded into the loan instead of being yet another upfront cost.
Lender-Paid Costs: Only about a fourth of your closing fees are negotiable, but the lender’s fee is one of them and, again depending on your credit and the market conditions, you may be able to convince your lender to lower it.
Title Costs: Most buyers and sellers simply opt to work with whatever title company the realtor suggests because they will have an existing relationship with them. However, you are always free to shop around for one with lower prices.
Bonus Tip: See if you can get your lender to push the title company to offer you a reissue rate instead of a new title insurance rate. These can be significantly cheaper.
And, of course, always compare what each title company’s plans actually offer you. “Penny wise and pound foolish” is the name of the game here.
If you are cash-strapped, you can also ask for a no-closing-costs loan. Fair warning, though: you’ll end up paying for it over the life of the loan—and it will likely be more than if you paid up front.
In the End
The American Dream is not exempt from the bureaucratic necessities of modern life. Many people and businesses have an important hand in helping you become a homeowner.
Want to learn more about the ins and outs of homeownership for first-time buyers? Answer a few questions here, and a home lending expert will contact you.