How to Save on Closing Costs
Point of Interest
A big expense that is often overlooked when buying a home is the closing costs, which can run between 3% and 5% of the total price of your loan. If you use some clever tactics, though, you may be able to save significantly on closing costs.
Most first-time homebuyers are fully aware that you have to make a down payment, even with a mortgage, to get the deal closed. What can come as a surprise, though, is the fact that you also have to pay closing costs on your loan in addition to the down payment. These costs can add up to several thousand dollars and if you don’t plan for them, may cause you to hit the brakes hard on your plans to buy a house.
If you’re trying to buy a home and are wondering how to save on closing costs to make the purchase more affordable, there’s good news. Several options exist that can help you trim the costs and secure your mortgage.
What are closing costs?
Closing costs is a phrase that refers to all of the additional costs that the buyer must pay when purchasing a home. Generally, this includes fees and costs for things like appraisals, home inspections, loan applications, mortgage brokers, title searches and multiple forms of insurance.
Closing costs will vary based on the price of the home, the specifics of your loan and the state that you live in. According to ClosingCorp, a real estate research firm, the average closing costs in 2019 were $5,749 (including taxes). The average costs by state ranged from as low as $1,909 (Indiana) up to as high as $25,800 (District of Columbia).
Ways to save on closing costs
Depending on where you live, saving on closing costs may be a minor or major concern. Regardless, no one wants to pay more money than they have to. If you’re wondering how to save on closing costs, there are a few tips and tricks you can use to bring the bill down, including:
1. Shop your options.
The total amount of closing costs include a lot of charges for different services rolled into one number. If you’re looking to save, you can try shopping around for better rates on some of these services. Some of the areas to start looking include insurance, inspections, the closing company and anything else detailed in your loan estimate. The loan estimate document will let you know exactly what you can and can’t shop around for and can be a great roadmap for potential savings.
2. Shop mortgage lenders.
While lenders aren’t required to give you an upfront estimate of your closing costs, you should be able to get a ballpark figure from most companies. Look to see how these estimates compare and find the lender that has the lowest prices. You may not find much of a discrepancy in pricing, but you could also be surprised.
3. Request help from the seller.
In some cases, the seller may be able to help pay for part of the closing costs for the buyer. Why would they want to do this? If the buyer is really looking to make a deal, then they may be interested in helping you out with the cash to make things move forward. If you’re in a hot market, chances are this won’t be an option. But if you are looking at a property that’s been on the market for a while, you should ask.
4. Push the closing to the end of the month.
One of the fees included in the closing costs is prepaid interest. If you want to save on this, you can delay your closing until the end of the month. This limits the time frame that you need to prepay for and in turn lowers your overall closing costs. Your mortgage lender should be able to help you choose the date that offers the most savings.
5. Avoid discount points if the rates are low.
Discount points allow you to pay an upfront cost to lower your overall mortgage rate. For people planning to stay in their homes for a significant period of time, paying for discount points can offer savings. However, if mortgage rates are already low, you may want to forego the additional savings altogether. Generally, each mortgage point costs 1% of the loan amount. Purchasing just a couple of points can easily add thousands of dollars to your closing costs.
The final word
Closing costs are a necessary part of the home buying process, as they pay the costs to everyone working behind the scenes to make the home purchase happen. That being said, there are no rational reasons you should ever pay more than you need to, especially if you’re trying to limit the upfront cash requirements.
What if I can’t afford closing costs?
If you can’t afford closing costs on your upcoming home purchase, you first want to try strategies to lower the upfront cost. If the strategies don’t bring down the closing costs enough to fit your budget, you may want to wait to purchase until you can afford them or choose a less expensive home.
Can closing costs be waived?
Closing costs can’t necessarily be waived, but they can be rolled into your total loan costs in some cases. Be aware, though, that you’ll end up paying interest on the closing costs that are rolled into your loan along with the principal. In most cases, this will cost you significantly more in the long run.
Why are my closing costs so high?
Your closing costs may seem high based on where you live, the value of the home you are buying or the service providers you are using. You may be able to bring these costs down by shopping service options, strategically scheduling your closing, requesting help from the seller or avoiding things like discount points.