The Easiest Ways To Save On Your Closing Costs That You May Not Know About
Closing costs encompass a number of different services and fees. In plain language, these are the added expenses that buyers and sellers incur when closing on a real estate transaction. Investopedia notes that closing costs can include loan origination costs, appraisal fees, title searches, title insurance, taxes, deed recording fees, and much more. According to Investopedia, closing costs are due at the closing of a real estate sale — finalizing the transaction — and are roughly between 2% and 5% of the total purchase price of the home.
Closing costs can add up quickly, with the average added financial weight coming in at $6,905 in 2021 for a single-family home, including taxes (via Bankrate). Naturally, seeking out a way to reduce these added costs is something that homebuyers are always working hard to do successfully. With some intelligent search approaches and an understanding of where closing costs are finalized, it's possible to keep some of this additional cash in your wallet rather than forking it over to the bank or the state.
Continue reading to learn more about the services and inclusions that closing costs entail and how you can reduce these fees with a few simple approaches.
Understand what's involved in your closing costs
The mix of closing costs you'll have to pay can vary based on several factors. Lenders will typically charge a buyer a series of different charges, and it can be immensely confusing to keep all these costs straight in your mind. The first step in working to reduce closing costs is a line item appraisal of the things you're being charged for.
Bankrate notes that buyers will always receive a loan estimate form (by law, this takes place within three days of your completion of the mortgage application). In this form, you'll be given a list of costs associated with the mortgage in addition to relevant details about the loan — the loan amount, repayment duration and monthly payment terms, and the interest rate you'll be paying.
It's essential to dig into this form to understand the full spectrum of fees and services you're paying for when taking out a mortgage and completing the transaction to move into a home that's now yours. This is the first step in the process because if you don't know what you are being charged for, it will be impossible to identify areas that can be reduced, items that you'll consider negotiating around, and more.
Shop around for title and settlement services
There are a number of line item additions to a loan estimate form that can be farmed out to alternative providers. Your mortgage lender can conduct these services through businesses or professionals that they partner with — and sometimes will provide a bundled discount to you as a result of their partnership (via Nerd Wallet). However, you can also shop around for certain services that are essential to finalizing a real estate sale and closing the deal.
Nerd Wallet suggests shopping around for survey and home inspection services but notes that some of the best discounts you might find in the essentials listed in Section C, page 2 (the Services You Can Shop For section of a loan estimate form) are found within the title insurance and settlement services.
The closing costs you can bring in a discounted rate service to complete will reduce the total amount you owe in these tacked-on expenses, saving you money across the board.
Close on a new home purchase at the end of a month
One aspect of closing costs that is unavoidable is the prepaid interest that is calculated based on the day of the month. NextAdvisor notes that it's conventional wisdom to close on a new home purchase at or near the end of the month if possible. This is because your mortgage insurance is calculated based on a daily rate and charged each month. For this first month in the home, if you close at the beginning of the month, you'll have to pay based on a larger count of remaining days. The farther into the month you can finalize a home sale, the greater the discount you'll tack on to the final closing costs to purchase the home.
You may not always be able to control the exact timing window for the closing of a new home purchase, but delaying this by as many days as you can is a great way to save money upfront. Nerd Wallet suggests making a simple calculation using the loan amount, interest rate, and a divisor of 365 (for the number of days in a year) to arrive at a daily interest charge. The longer you can push back the closing of your purchase will save you this amount per day.
Use a no closing cost mortgage for an alternative payment structure
A no closing cost mortgage is an option for homebuyers that want to change their repayment structure (via The Washington Post). No closing cost mortgage terms will increase the interest rate that drives your repayments to the lender in order to account for the cost of closing, but it rolls these costs into the mortgage term rather than forcing you to pay the closing upfront. This can be a positive change for some who might be stretched thin when it comes to free capital or intermediate cash flow.
It's important to remember that a no closing cost mortgage will come along with higher monthly payments to account for this difference, according to Nerd Wallet, so the benefits upfront is seen as a potential negative elsewhere.
The Washington Post also suggests that a way to circumvent a cash flow squeeze is to borrow additional funds that cover the closing costs — thereby effectively paying yourself back without having to account for an inflated interest rate. Although, again, it's crucial to factor this additional borrowed capital into your ongoing repayment schedule.
Negotiate as much as possible for meaningful reductions
Negotiation is a key strategy when working to eliminate portions of your closing costs. Capital One reports that asking for reductions and discounts can help get some of the fees typically associated with the closing process waived. Just by asking, you might be able to get the application fee eliminated from the equation. Capital One also suggests that an itemized list of fees can help keep you from paying for a line item twice. This list can help you understand if property appraisal costs are already included in an application fee, allowing you to cut this out from the expenses later on.
Negotiation is a key resource for homebuyers. If you are purchasing a home in a particularly positive marketplace for buyers, you may be able to negotiate with the seller and their agent to share some of the expenses in closing, as well. In truth, every part of the transaction is up for negotiation, and nothing is absolutely set in stone. While lenders and sellers may not be willing to move much on certain aspects of the closing (and you'll have to pay taxes based on the appraisal, without any real wiggle room), some features of the closing costs are highly fluid, and a reduction or elimination can net you a great discount.