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How to Reduce Closing Costs: A Guide for Home Buyers and Sellers

Monday, July 6, 2020

Paying for closing costs is the last hoop to jump through when it comes to buying or selling a home. However, it can also represent a good amount of money. 

These costs are paid to third parties in order to facilitate the transaction. Typically, it's going to cost between 2% and 7% of the home's purchase price. 

By knowing how to reduce closing costs, you could end up saving yourself from having to pay hundreds or even thousands of dollars that you don't have to. By just making a few smart decisions, you could end up buying a new refrigerator or television with the money that you save.

So continue reading, and we'll walk you through some of the best strategies to reduce your closing costs.

Compare "Loan Estimate" Forms from Lenders

After the buyer applies for a mortgage, the lender will have to produce the three-page "Loan Estimate" form within three business days. The closing costs will first be itemized in this document. Although it isn't required, some lenders will give you a Loan Estimate form before you even apply for a loan, although this isn't required. 

It's worth knowing that you'll receive a “Closing Disclosure” form, which is a final "bill," three days before the closing. The Loan Estimate form will give you the opportunity to compare costs among lenders. 

Know Where the Savings Are

You will see the cash needed to close the loan and total closing costs at the bottom of the first page of the Loan Estimate form. The root of your savings will be on page 2, Section C: “Services You Can Shop For.” These fees include:

  • Survey
  • Escrow agent, also called a closing agent or settlement agent, who represents the purchaser and oversees the legal transfer of the title and the closing
  • Pest inspection
  • Title search, which looks into the history of the property for liens or restrictions
  • Lender's title policy, which protects the lender in case there is a problem with the title

Out of these fees, you can save the most money on settlement services and title insurance, which are usually combined. Comparison shopping among surveyors and pest inspectors may not save you a ton of money, but it doesn't hurt to check.

Push Back on Lender Fees

You might have to pay a flat fee that includes services such as originating and underwriting from a lender. Other lenders may charge for each of these services separately. There's nothing wrong with either of those methods.

However, when you start seeing multiple line items of itemized charges for a mortgage lender, they're nickel-and-diming you. And that's true for costs for any closing service. 

You also want to look out for costs with ambiguous names, such as "delivery fee" or "funding fee." If you see a fee with a name like this, then you should ask your lender about it. It might get rid of certain fees, or you may want to look for a different lender that doesn't charge you for as many items. 

Shop for Settlement and Title Services

If you are planning on shopping for settlement and title providers, you want to do so quickly. A good amount of time will be needed for these firms for research as well as preparing documents. 

Your lender might recommend companies to you that could be good deals. For example, a lender may be able to negotiate a volume discount, or they may know that the service from one particular company is exceptional. But you also want to do your own research online and also aks family and friends for recommendations. 

All of this research is worth committing to as it could end up saving you hundreds of dollars in the end. 

Close at the End of the Month

One of the easiest ways to lower your closing costs as a buyer is to have your closing take place at the end of the month. If you close at the start of the month, such as April 6th, you might have to pay the per diem interest from the 5th to the 30th.

However, if you close on the 29th, then you pay for only one day of interest. 

Ask About Rebates and Discounts

Some banks offer their current customers incentives on their mortgages. For example, Bank of America will reduce your origination fees if you're a "Preferred Rewards" member. It's the bank's way of rewarding loyal customers. 

Wrap the Closing Costs into the Loan

For most people who are already borrowing hundreds of thousands of dollars, they don't see much problem in borrowing just a few thousand more. Although your lender will charge more for this, it's still a good way to get into the home while paying less cash upfront. 

You also might want to think about a no closing cost mortgage. With that type of loan, your lender pays your fees but you'll end up having a higher interest rate on your loan. 

The Importance of Knowing How to Reduce Closing Costs

Whether you're buying or selling a home, you want the process to go as smoothly as possible while saving as much money as possible. And by knowing how to reduce closing costs, you can end up saving significant amounts of money without sacrifice the efficiency of the closing process. 

Do you want to ensure that your sale goes as efficiently as possible? Contact us today to learn about our exceptional title policies!

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