The interest rate on your home loan isn’t the only thing you need to be concerned with. It pays to negotiate on all your home loan terms.
Closing costs for a home average 3% of the purchase price, and could go as high as 6% in higher-tax areas. Plus, you still have to come up with the down payment, but if you’ll use the following tips, it could save you on those closing costs:
1. Have the seller pay closing costs
You can hit up the sellers for some or all of your closing costs. You even get a tax break for mortgage points the seller pays (each point is 1% of the loan amount). Be careful, though. If the sellers have already slashed their price to the bone, they may tell you to take a hike. If the sellers won’t play ball and you don’t have enough cash for closing — but you can afford a larger mortgage — it may make sense to bump up the price you pay for the home and have the sellers use the extra money to pay closing costs for you.
Note that there are built-in limits to a seller’s generosity: Freddie Mac and Fannie Mae allow sellers to pick up closing costs worth 6% of the purchase price for loans with 10% or more down; the Federal Housing Administration allows up to 6%; and the Department of Veterans Affairs allows 4%.
2. Shop loan terms
The “no-cost” mortgage, which rolled most closing costs into your interest rate, has largely disappeared, and lenders have resurrected fees for everything. Charges vary dramatically, so it pays to shop around and negotiate on all the loan terms, not just the rate. Borrowers have regained muscle as the market has become more competitive.
Call three or four lenders for their best rates (preferably without points) and an estimate of their fees (excluding third-party charges and escrowed amounts for taxes and insurance). Apply with the lender that’s offering the best deal to get a good-faith estimate. If you’re willing to pay more than one application fee, get two estimates and play the lenders against one another. If you’re refinancing, your current lender may offer a discount on fees.
3. Pay less for PMI
If you’re putting less than 20% down, you’ll have to come up with premiums for private mortgage insurance. Monthly premiums for PMI typically cost 0.5% to 1.5% of your loan amount per year, depending on how much equity you have, your credit scores and whether you get a fixed or adjustable-rate loan. You could negotiate with the seller to pay a single premium upfront, or you could roll that single premium into your loan.
The downside of taking a larger loan is that you’ll pay more interest for the life of the loan or until you refinance (PMI automatically cancels when your equity reaches 22% of the home’s value). But you can deduct the extra interest and not worry about the limits on deducting PMI premiums.
4. Find cheaper title insurance
Title insurance protects against challenges to your ownership, with separate coverage for your lender and for you. But as much as 80% of the premium goes to paying commission to a title agent. You can shop for cheaper title insurance online.
If you have any questions about ways to save on closing costs, just use the comment link below to contact us. Your email address, though needed to post a comment or question, will never be published on this website for your privacy and protection. We’d love to hear from you.