How to Lower Closing Costs
When you buy or sell real estate, various fees and expenses add up, prompting the question, “how do I lower closing costs?” Your real estate agent will give you plenty of warning about these necessary expenses, such as commissions, earnest money deposits, or down payments. In most transactions, both buyers and sellers usually pay for some type of inspection and appraisal. Depending on the market, either the buyer, seller, or both parties will pay closing costs too.
Since typical closing costs range between 3-6% of the loan balance or up to 3% of the total property value for cash offers, all buyers can benefit from lower closing costs. Thankfully, Marketplace Homes offers solutions to keep closing costs low, so people pay less at the closing table.
What are closing costs?
Closing costs are the fees that are paid at the closing table to ensure the property’s title is transferred to the buyer. It must be paid whether the transaction is paid in cash or with financing. It can also include other legal and lender fees. In a buyer’s market, the seller typically pays closing costs to sweeten the deal, but in a seller’s market, it usually falls in the buyer’s court. There are generally five types of closing costs, and not all are applicable for each transaction.
- Title/Attorney fees
- Escrow fees
- Mortgage Insurance
- Lender fees
- Property-related fees
There are a few ways to reduce or eliminate a few of these closing cost types. What are they, and how can you ensure you get the best deal possible? Here are a few ways you can lower closing costs.
How to Lower Closing Costs
Here are some ways to lower closing costs. For the best idea of what options are available to you, speak with your lender and a financial advisor.
1. Pay with All Cash.
If a buyer uses financing, the closing costs will range between 3-6% of the loan balance or mortgage amount. Cash buyers pay fewer closing costs since they won’t need to pay for any lender fees that are lumped into the final amount. Why? Because they skip the lender-related fees, which may include (but are not limited to):
- Loan origination charges
- Loan application fee
- Loan processing fee
- Credit report fee
- Underwriting fees
- Wire transfer/delivery fee
- Home inspection fee
- Termite inspection fee
- Appraisal cost
Cash buyers still need to pay some closing costs, which include title insurance and title search fees, escrow fees, property taxes, transfer fees, and recording fees. Though you’re not required to get a homeowners insurance plan or pay for inspections as with a mortgage, it’s smart to get them to protect your investment.
2. Shop around.
If you choose to go with financing, then it’s important to choose a lender that’s on your side. Pick one that you trust, who won’t nickel and dime you with vague fees, and make sure you have a loan officer who takes the time to explain everything in the closing disclosure. You should shop around for the right lender who can offer you the most competitive solutions and beneficial closing experience.
Though lenders will work with their preferred title and settlement providers, you have a right to shop around for your own too. If you do decide to go with a provider that offers lower fees, you need to act fast since it takes time to prepare documents for closing.
3. Ask about all the itemized fees.
If you use financing to buy a property, then you still have ways to reduce your loan-related closing costs. Before closing, you will get a document that line items every estimated fee that you will be responsible for on closing day. Seeing multiple line items for loan-related fees should prompt you to ask questions.
If you see any fee that looks vague, such as “delivery fee,” it’s important to have your lender specify what it means. Simply asking can help you understand why the fees are there. You may also negotiate with your lender to reduce or eliminate fees that seem erroneous.
- Tip: if you get a loan through a bank and are in good financial standing, you may be able to get exclusive rebates or discounts, which can cut costs on the origination fee.
4. Pay for inspections out of pocket.
Instead of rolling the costs of mandatory and elective inspections into the closing costs, pay for them separately so that you pay less on closing day. This simplifies the process and helps you budget more efficiently. In a typical real estate purchase with a loan, you will need to pay for a home inspection, termite inspection, and appraisal. There may even be a radon inspection for properties with basements.
5. Pay down points to avoid mortgage insurance.
Though mortgage insurance (also known as PMI) is often divided into a monthly extra cost until your loan is paid down to a certain degree, it’s itemized as another expense on the closing disclosure. Thankfully, you can avoid this ongoing cost by paying down your loan by at least 20%. This reduces your “risk factor” and makes PMI not necessary.
So where do you get the lump sum? It’s possible to arrange for the proceeds of the sale of your first home to go toward a large down payment. However, in a competitive seller’s market where home sale contingencies can make a less competitive offer, solutions like Sell & Stay can convert your home equity to cash. Marketplace Homes will buy your home, give you the cash that was locked in your equity, and let you stay in it as a renter as you figure out your next steps.
If you want to buy a new construction, our Guaranteed Buyout program can also help. Buy a new home from one of our builder partners and we will buy your home so that you can move confidently.
6. Can’t avoid closing costs? Roll it into the loan.
Your last resort should be to get a loan that incorporates your closing costs into the monthly mortgage payment. A no-closing cost mortgage is the most advantageous when interest rates are low, since the interest rate of this type of loan is higher than a standard mortgage. Though this option isn’t the best for anyone shopping for the best monthly payment, it is one of the only ways a person without lump cash can become a homeowner. Later on, as interest rates improve, refinancing can be a great option, especially when the owner pays down the mortgage to no longer pay PMI.
Find Solutions to Lower Closing Costs at Marketplace Homes
Marketplace Homes is a nationwide full-service brokerage that can assist you with everything from buying a new home to releasing a portfolio of investments. Contact us to connect with one of our real estate experts who can offer you creative solutions like Sell & Stay to lower closing costs.