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Closing costs are fees associated with a home purchase that are paid at closing. Buyers and sellers both pay closing costs. Who pays which costs is often set by local custom, but it can be negotiable. Typical buyer closing costs include such items as: fees associated with getting a mortgage, homeowner’s insurance, titles and closing fees, inspection fees, proration of property taxes, and pre-paid taxes and insurance for an impound account.
Often it’s easier for buyers to qualify for a mortgage than it is for them to come up with enough cash for the down payment and closing costs. Down payment amounts vary from as much as 20% of the purchase price to loan options that require no down payment. In addition, closing costs can run another $5,000 to $15,000, depending on where you buy and the cost of your loan.
One of the easiest ways to lower your closing costs is to get a no-point mortgage. "Points" is the term used for the loan origination fee. One point is equal to one percent of the loan amount. For example: a $400,000 mortgage with a 2-point loan fee will cost you $8,000 at closing. You can expect to pay a higher interest rate on a no-point loan.
Another way to reduce your closing costs is to close late in the month. Lenders usually collect interest for the current month at closing. If you close on the fifth day of the month, you’ll owe the lender 25 days of interest at closing. If you close on the twenty-fifth day of the month, the lender will collect 5 days of interest when you close. Closing at the end of the month can reduce your closing costs considerably if your loan balance and interest rate are high.
Asking the sellers to credit you money to pay for some of your closing costs is another way to reduce the amount of cash you’ll need to close. Keep in mind that when you ask sellers to do this, it’s the same as asking them to accept less for their home. For example, if you offer $400,000 with a credit from the sellers of $5,000 for your closing costs, this is the same as a $395,000 offer. In a competitive situation, where multiple buyers are trying to buy the same home, you may have to pay full price or more to be the successful bidder. If you need the closing cost credit to make the deal work, raise your offer price by the amount of cash you need and then ask for the credit. For example, if the list price is $400,000, offer $405,000 with a $5,000 credit for your closing costs. The property must appraise for the higher price for this to work. Also, lenders have restrictions on how much they’ll allow sellers to credit for closing costs: often it’s 3 to 6 percent of the purchase price. And, some lenders won’t allow a credit that exceeds the actual amount of the buyers’ non-recurring closing costs (costs paid by the buyers one time only at closing, such as points and title fees).
When you meet with your loan consultant for the first time, be sure to discuss with them all the options available to reduce your closing costs based on the type of loan program that you determine is best for you. If you are not currently working with a lender you know and trust, I would be pleased to refer you to one of the loan consultants I trust to serve my Buyers. Just give me a call or send me an e-mail, and I'll get the information you need to you promptly.
Janice Spencer, Broker/Owner
Windermere Signature Collection
925-250-0399
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