8 Ways to Reduce Mortgage Closing Costs
Mortgage closing costs can be one of the most difficult aspects of buying a home or refinancing a current mortgage. Costs can be high, ranging anywhere from 2%-5%, depending on your locale, lender, and type of mortgage. (See also: How to Choose the Right Mortgage Loan Term)
Typical costs include the application fee, origination fee, and fees for home inspection, appraisal, credit report, and an attorney or closing agent. Some, like the application fee, are paid to the lender. Others, like the appraisal and home inspection, are paid to third-parties and have less room for negotiation.
Homeowners may feel they have little control over the charges. On top of that, most closing costs are not tax deductible. Nevertheless, it's possible for home buyers and homeowners to reduce their closing costs.
1. Shop Around
When shopping for a mortgage lender, ask lenders about their closing costs when you ask about their interest rates. Ask about their application fee, loan processing fee (also known as an underwriting fee), and third-party fees paid to others, such as appraisers. Are fees refundable? When are they paid? Most home buyers will just ask about their mortgage rate, but they should also shop for the lowest lender fees, especially the origination fee. Try to nail them down and don't be satisfied with a general "three percent of the loan amount."
2. Know the Score on Points
Points, sometimes called prepaid interest, are typically the largest single closing cost. One point equals 1% of the mortgage amount. Some lenders charge one point, while others charge two, or even more, points in return for a lower rate.
Find out upfront if the points are "bona fide discount points" that lower your interest rate or just another lender's fee. Generally, one point should reduce the interest rate a quarter of a percentage point. If you expect to stay in the home for a while, say five years, you probably should consider paying extra points for a lower rate.
Points for the mortgage used to purchase your home are typically tax deductible in the year you buy the home, while points for refinance loans are tax deductible over the life of the loan. (See also: How to Refinance Your Mortgage)
3. Question Lender Fees
Federal law requires mortgage lenders to provide borrowers a Good Faith Estimate of closing costs within three days of the loan application. It's just an estimate and can change significantly, up to 10% by law, by the time the loan closes. Examine those fees and ask the lender to explain them.
Some lenders charge an origination fee, which is a percentage of the loan amount. They may also charge a loan processing fee, an underwriting fee, a document preparation fee, and an administrative fee. Question those fees. They're basically the same thing. Although some borrowers, like those with impaired credit, legitimately require more work, some of those fees might be duplicative. (See also: 21 Real Estate Terms Home Buyers Should Know)
4. Scrutinize Final Costs
At the loan closing, lenders must provide borrowers settlement papers known as the HUD-1 form. Ask for the paperwork a day before the loan closing, so you have time to go over the documents. Scrutinize closing costs line by line, and question discrepancies between the Good Faith Estimate. Most homeowners glance over the list without asking questions about particular costs, but not all costs are etched in stone.
Just asking for a discount could prompt the lender to lower the price. It certainly doesn't hurt to ask. Some borrowers may feel odd about wrangling over a $200 fee when obtaining a loan of $200,000 or more. But $200 is still $200.
5. Request an Appraisal Waiver
If you're getting a refinance and had an appraisal recently for a previous refinancing or when you purchased the home, ask your lender if it can waive the new appraisal requirement. You can also request an appraisal waiver if you have plenty of equity in your home and are not getting a cash-out refinance.
6. Get a Title Insurance Discount
When you buy a home, you purchase a new title insurance policy for a one-time fee. When you refinance your mortgage, you can receive a large discount off the cost of a new policy. Although many lenders provide it automatically, ask for it to make sure you get it.
7. Ask the Seller to Pay
Home buyers can ask sellers to pay closing costs in addition to negotiating for a lower sale price. The seller can benefit from paying closing costs by getting the buyer committed to the sale, selling the home sooner. Remember that seller contributions are linked to the home price and could mean a higher sale price. (See also: Buying Your First Home? Here's What You Need to Know)
8. Consider a No-Closing-Cost Mortgage
Some lenders can waive closing costs in return of charging a slightly higher mortgage rate, or can let borrowers add closing costs to the loan amount. These loans are not truly "no cost." Obviously, there are trade offs. If you plan to stay in the house over five years, being stuck with a higher rate over five years might not be worth it.
Did you try to negotiate or otherwise reduce your mortgage closing costs? How did you do it?
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