A major financial investment is required to buy a house.
It can be expensive to purchase a home. From the down payment to the daily expenses that come after you move in, it can be quite costly. There are some areas homeowners might be able to cut costs, such as closing costs.
You can negotiate lower closing costs, or you can roll these expenses into your loan. Continue reading to find out how to waive closing costs and the financial consequences of doing so.
What are the closing costs?
When you apply for a mortgage to purchase a home, closing costs are the fees you have to pay. As the buyer, the closing fees go towards paying third parties such as your mortgage lender.
These fees can be added to closing costs:
- Appraisal fees
- Title services
- Charges for credit reports
- Lender origination fees
- Costs of government recording
- Tax service fees
- Survey fees
- Underwriting fees
- Attorney fees
The buyer generally pays all closing costs. Buyers can request that the seller grant them a credit to help with closing costs. This usually results in the seller increasing the price of the house to pay the costs. Instead of paying closing costs upfront, the buyer adds them to the loan amount.
Lenders may also be able to offer credit to cover closing costs. This could mean that they will either increase your loan amount or charge you a higher rate of interest in return.
What are the closing costs?
Closing fees are usually 2% to 5% of the purchase price. The following factors, along with the cost of your house, can impact how much you pay for closing costs.
- Localization of your home
- Size of your home
- Amount of down payment
- The amount of the loan
- Lender term (length of loan)
- An annual property tax payment
- Cost of homeowners insurance annually
- Interest rate
Credit Karma’s Closing Costs Calculator will give you an estimate of your closing costs.
Can closing cost be negotiated?
Buyers can negotiate closing costs fees. You can negotiate terms and costs for your mortgage, up until the closing date. However, neither the seller nor the lender have to agree to lower costs. It doesn’t hurt asking. There are some mortgage fees that are more difficult to negotiate than others.
You’ll usually have more success negotiating the fees your mortgage lender charges than fees from third parties. This is because lenders typically pay fees to third parties at a fixed price and don’t have the ability negotiate rates down. It will be more difficult to negotiate a deal.
- Appraisal fees
- Tax service fees
- Charges for credit reports
- Flood certification fees
How can you reduce or waive closing fees
These are some of the options available to you if you wish to reduce or eliminate closing costs such as lender fees.
- Buy lender credits. Lender credits reduce closing costs, but you agree to pay a higher rate of interest. This will increase the overall cost for your mortgage.
- Ask for a mortgage with no closing costs. This can help you save money in the long-term. This usually means that the lender will charge a higher interest rate, or add the closing costs to your mortgage. The result is a higher total loan.
- Apply to an FHA loan. FHA loans have lower closing costs and down payments for qualified buyers.
What’s next?
It’s a smart idea to use a closing cost calculator before you start looking for homes.
It is also a smart idea to do a financial assessment to determine how much down payment you can afford, how much mortgage payments you can afford, and how much to save for closing costs. Budgeting for ongoing homeownership costs such as homeowners insurance and property taxes is also important.
You can save money on closing costs and mortgage fees by getting quotes from multiple lenders early on in the process. This will allow you to determine which lender offers the best interest rate and lowest fees for your particular situation. FHA loans, which are government-backed loans, can be included in your search. These loans have lower closing costs and interest rates.
A first-time homebuyer program may be able to help you get your first home.