How to Minimize Closing Costs when Purchasing Real Estate
Closing costs.
The very phrase seems to cast a shadow over your dream investment, conjuring visions of draining your hard-earned money. So, of course, you want to know if there’s any way you can keep the closing cost as low as possible, especially when it usually comes in at up to 5% of the total home’s purchase price.
The good news is, unlike many of the costs of home ownership, you can have some control over closing costs.
In this article, we’ll discuss how you can keep your closing costs minimal so you can maximize your cash flow potential on your rental properties.
What Is A Closing Cost
Before trimming down those closing costs, let’s ensure we’re on the same page about what they are. To put it simply, closing costs are the fees associated with finalizing a real estate transaction when the property title is transferred from the seller to the buyer.
Some of the fees charged by the lender and other vendors can include the following:
- Title Search: The fee you pay the title insurance company for searching the home title.
- Lender and Owner’s Title Insurance: The cost to insure the title for the lender and the title to protect you for the home’s full value.
- Home Appraisal Fee: The fee for the appraiser to assess the home’s value.
- Mortgage Application Fee: The cost associated with processing your mortgage loan application.
- Escrow Fee: The money you pay to the closing company.
- Attorney Fee: In some states, you have to pay a fee charged by a real estate attorney to prepare and review your home purchase agreements and contracts.
- Flood Determination and Monitoring Fee: The cost of hiring a certified flood inspector to know whether the property is in a flood zone and requires flood insurance.
- Pest Inspection: The fee of a professional pest inspector to check any damages, like termites, dry rot, and any similar damages.
- Property Tax: You have to pay all local property taxes that you incurred within 60 days of when you purchased the home.
The closing costs can differ by location and property value. Typically, the closing costs are about 2% to 7% of the home’s purchase price.
7 Ways to Slash Closing Costs
Now, let’s move forward to learning how you can reduce closing costs to a more manageable level.
1. Shop Around for Mortgage Lenders
Like how you’d hunt for the best property deal, do the same for your lender. You’re already spending a lot of money, so finding a lender offering the lowest closing cost is best.
Do this by going to at least three banks. For each bank, get a legally binding loan estimate, which includes your loan amount, interest rates, and monthly payments. Remember that federal law requires lenders to provide you with the loan estimate within three days of applying for a mortgage.
Once you get the loan estimate, look for the Services You Can Shop For section. The services include quotes for a pest inspection, survey, and fees for title search, survey work, settlement agents, and the lender’s title insurance policy. The vendors listed by your lender will only be their preferred vendors, but you’re not required to work with them, and the lender must offer you alternatives.
If you decide to work with a lender-provided vendor, they cannot change the pricing by more than 10% from the original quote. Conversely, if you work with a vendor, not on the list, they can change their pricing (without limit) before closing.
2. Review the Loan Estimate
After receiving the loan estimate provided by the lender, carefully review this document. You shouldn’t skip this, because this is when you can push back on any fees and ask your lender to clarify anything you can’t understand in the document.
If your lender lists many vague fees and you can’t have them removed, consider moving on with a lender that doesn’t require you to pay for additional services.
3. Know What The Seller Pays For
Wondering about the division of closing costs? There’s a clear breakdown: certain costs fall under the buyer’s responsibility, while others are typically borne by the seller, including real estate agent commissions.
If you’re eyeing a clever move, consider requesting the seller to pitch in and cover a portion of your expenses, neatly labeled as “seller credits” on the loan estimate document.
While this approach might not hold firm in a seller’s market, where their sway is greater, it’s still a common practice. As a testament to this, a recent study by Redfin in early 2023 revealed that over 45 percent of home sellers willingly offered concessions of various forms to sweeten the deal for their buyers.
4. Consider a No-Closing-Cost Mortgage
Consider a no-closing-cost mortgage option. While it might mean slightly higher interest rates, it can help you avoid paying a hefty upfront sum. This strategy is advantageous if you plan to hold the property for a shorter period.
5. Look for Grants and Other Assistance Programs
Tons of cities, counties, and states offer assistance programs to help out with down payments and closing costs for eligible homebuyers, especially first-time homebuyers. If you make the cut, these programs can be a real lifesaver when tackling those closing expenses.
Explore what programs are available in your area, and ask your real estate agent if they know any programs that could be a perfect fit for you.
6. Consider Lender Credits
Some lenders offer the option of lender credits, which cover a portion of your closing costs in exchange for a slightly higher interest rate. Do the math to see if this trade-off works in your favor in the long run.
7. Try Closing By the End of the Month
If you can time your closing to be at the tail-end of the month, you can cut down on the cash you must shell out during that closing shindig. How? Well, it’s all about reducing those per diem interest days that lead up to your first mortgage payment, usually due on the first of each month.
To calculate how much you can save, multiply your loan amount (the total amount you borrowed) by your interest rate (For instance, if your interest rate is 6%, multiply it by 0.06). Then, divide that number by 360, not 365, to get your daily interest charge. After that, multiply your daily interest charge by the number of days left in the month + the first day of the following month.
If you receive your funding by the end of the month, the figure will be way lower than if you were shaking hands with your closing mid-month.
Take Control of Your Closing Costs
Closing costs might seem like a formidable foe, especially when the costs can quickly add up and place a financial burden on buyers and sellers in real estate transactions. But, if you know and apply these strategies, you can effectively minimize closing costs and save tons of money.
Remember, don’t settle with what your lender quotes you, and shop around to compare costs from other lenders. You should also negotiate where possible and ask for help from professionals throughout the whole closing process. A proactive and diligent approach to this process allows you to buy more affordable homes with minimized expenses.
Not sure if you can do it on your own? We at Logical Property Management can assist you throughout the process and ensure that you can have a smoother transaction process without breaking the bank. Contact us today!