When it comes to purchasing a home, closing costs are just part of the process. If you’ve purchased a home before, you know that transferring a property and obtaining a loan can be complex. Not only is it a lot of paperwork, but it requires help from numerous different sources and unfortunately for the home buyer, they don’t do that work for free.
On average, closing costs can cost you between 2 percent and 4 percent of the home price – which can add up very quickly. Haggling on the price you pay for your home is just part of the process – but can you negotiate your closing costs as well?
First let’s dive into what are included in closing costs.
Closing costs include payments to a variety of people and organizations. Some of those fees depend on the decisions you make—like which lender you work with, and others are costs beyond your control, and you’ll need to pay them regardless of where you obtain financing. For example, your county might charge fees and taxes to record your deed. Likewise, you may need to include property insurance and taxes in your closing costs, but those are required no matter where you borrow. While it’s important to understand what all the fees and costs are, it’s best to focus your efforts on expenses that you have some control over.
What Fees to Expect
Application fee: Many lenders charge and application fee that typically covers the cost of an appraisal and credit report.
Discount points: This is an upfront charge that you may pay to qualify for a lower interest rate. A point is 1 percent of your loan amount, but one point typically does not reduce your interest rate by one full percent. These fees may make sense if you’re going to keep your loan for the long term.
Origination fee: The origination fee compensates people for marketing, helping you with the borrowing process, and performing other duties.
Credit check: You may see this fee from some lenders who break out their fees separately, while others bundle this into the application fee. It’s a fee to review your credit history.
Title fees: The title search attempts to discover if anybody has a legal claim to the property that you are buying (such as liens on the property), and a title insurance policy protects your lender (not you) if any claims come up after closing. You can purchase additional coverage to protect yourself as well as the lender, which is probably wise.
Appraisal: Your lender will hire an appraiser who will provide an unbiased opinion of your home’s value. This fee is typically included as part of the application fee.
Other fees go by a variety of names, including underwriting fees, processing fees, and more. Ask your lender which fees they charge, and what you’re paying for. You’ll also pay local governments and other organizations, depending on your loan, but those charges typically aren’t within your lender’s control.
Some other fees that may vary depend on the type of loan and where your home is. If you don’t put a 20% down payment on your home, you may have to pay mortgage insurance premiums or PMI – which are typically added to your mortgage each month. If you buy a property with a homeowner’s association (HOA), you may have to pay separate fees as well.
So how do you know exactly what you are paying and how to save money?
Step 1: Ask your lender for a ‘Loan Estimate’ form
Your closing costs will be given to you in an itemized list in the “Loan Estimate” form that your lender will provide within three business days after you apply for a mortgage. This form lets you comparison shop between companies’ total costs and also dig into specific fees once you’ve chosen a lender.
Step 2: Know where the savings are
The bottom of the first page of the Loan Estimate form shows the total closing costs and cash needed to close the loan. There will be a specific section – Section C, which lists the “Services You Can Shop For.” These fees may include: Pest inspection, Survey, Title search, Title insurance binder, Lender’s title policy,
Settlement agent. The most potential for savings is in the title insurance and settlement services, which are often combined.
Step 3: Push back on lender fees
A lender might charge a flat fee that wraps in services such as underwriting and originating, while others charge for each separately. A red flag is when you start seeing more than one, definitely two, three, four- or five-line items of itemized charges to a mortgage company – you may be nickel-and-diming you. Other red flags may be a “funding fee” or “delivery fee.” If you see these fees, ask your lender about them. They might remove certain fees, or you might need to look for a different lender that doesn’t charge as many.
Step 4: Comparison shop for title and settlement services
The time to shop for title and settlement service providers is asap. These firms require time for research and preparing documents. Just because you can shop for these services though, doesn’t mean you need to. The companies your lender recommends might be good deals because your lender negotiated a volume discount or knows a particular company’s service is outstanding.
Step 5: Ask the seller to contribute
This may not be the best idea for everyone. Depending on the market and the home, a seller might contribute money toward your closing costs.
Step 6: Sign loan papers near the end of the month
You’ll have some prepaid or “per diem” interest for the period between your loan closing and the start of the new month. Closing at the end of the month can reduce these costs.
Step 8: Break out the Champagne. You’ve done your due diligence, you’ve shopped around, and with what you’ve saved on closing costs, you deserve it!
At Litchfield Bancorp we make sure that our customers understand every step of the mortgage process. If you have questions about the application, Loan Estimate form, or closing costs, we’re here to help. Stop into any of our local branches or give us a call!
Vice President, Senior Mortgage Lender
NMLS MLO ID: 532621