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How to Find Cheaper Closing Costs on your Mortgage
One of the more annoying costs about obtaining or refinancing a mortgage is paying closing costs which can be considerable depending on the loan. For many, closing costs are often not initially considered when getting a new or renewed mortgage. Sometimes, closing costs must be paid out of pocket as well.
However, there are ways to reduce your closing costs so that you keep more of your money. It is important to understand what closing costs are, the different types that exist, and how you can find different resources to lower the closing costs for you.
What are Closing Costs?
Closing costs are fees that borrowers pay to the lender and third parties such as insurance and title/escrow companies. There are also optional fees that might be paid as well, such as for mortgage discount points.
Also, there are two different types of closing costs, recurring and non-recurring. The difference is that non-recurring closing costs need only to be paid one time while recurring closing costs must be paid more than once. Many borrowers will have to pay both types of fees depending on a number of circumstances.
Types of Recurring Closing Costs
- HOA Dues
- Property Taxes
- Homeowner’s, Flood and Mortgage Insurance
- Types of Non-recurring Closing Costs
- Lender fees (both underwriting & processing)
- Loan Origination Fee
- Mortgage Discount Points
- Appraisal Fee
- Home Inspection & Termite Fee
- Credit Report Fee
- Building Records Fee
- Title & Escrow Fees
- Document Preparation, Recording & Wire Fee
- Notary & Messenger Fees
- Transfer Taxes
The number of closing fee costs can certainly pile up quickly when obtaining or renewing a mortgage. This means that you will need to consider all of these fees in order to know where you can save money and keep more cash in your pocket. What follows are a number of safe, legal strategies that can help you save more money on closing costs.
Traditional Tips for Reducing Closing Costs
If you are obtaining the mortgage for a new home, you can help reduce your out of pocket expenses by getting contributions from the seller. This is actually one of the most common means of reducing closing costs.
During the negotiation to purchase the home, you can ask to include part of the closings costs as part of the deal. While this will generally lead to a higher price for the home, which is the part you pay, it can offset much of the closing cost expenses as well. Essentially, this means that you get a higher loan from the mortgage company and use part of that to pay the closing costs. For buyers who are short on cash, this is a common method to reducing closing costs.
Another way to help eliminate closing costs is working with the lender. In essence, you negotiate a higher mortgage rate in return for a lower settlement or closing costs. This method is commonly used for refinancing a mortgage, but it can be used for new ones as well.
In essence, the rate that you negotiate is often a fraction of a percentage which adds a little to your loan, but the extra money is used to offset the closing costs. For example, instead of taking a loan of 4.5%, you take one of 4.75% which gives credit back to you and covers part or all of the closing costs. Essentially, this is a tradeoff as you are paying slightly higher prices each month on your loan, but the effect is to reduce any out of pocket costs.
The Real Estate Agent
Another simple, yet effective method is to simply ask the real estate agent to provide credit towards the closing costs that are incurred. Of course, they can always say no, but it never hurts to ask and if they need your business, they just might use part of their commission to help pay off the closing costs in return for making the sale.
In this manner, since the money is coming from the real estate agent’s commission, you do not have to take out a higher loan or negotiate a higher price for the home. This is another, highly popular way to help reduce closing costs.
Of course, you can combine different credits from the seller, lender and the real estate agent. Just remember that you should not exceed the maximum allowable by the lender. If you find yourself with an excess of money after paying your closing costs, then it is best to use this to reduce the overall rate.
Other Methods to Reduce Closing Costs
Remember that you can shop around to find the best lending companies that will reduce your closing costs. You can comparison shop for title insurance or homeowner’s insurance and even home inspectors to find the best deal. You can check out the different fees that banks and lenders charge to find the best rates. A little extra footwork can lead to you saving hundreds of dollars or more.
You can also use Prepaid Interest, the per diem interest that is due between the time you close on the mortgage and your first payment. If you can reduce the number of days between the per diem due at closing, then you can reduce your closing costs significantly. This is somewhat tricky as lenders may not close in time for that to take place.
If you are refinancing your mortgage, you can try to roll the closing cost into your new loan which is a common practice, especially if what you get back is considerable and you plan to sell your home in the near future.
You’ll want to check on all other options as well, there are a considerable number of sources that you can use to find ways in reducing closing costs. There are special programs, outside assistance and the like. It pays to take the time to look around first before making any commitments to find the right deal or set of deals that result in lowering your closing costs.
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