The Secret to Avoiding Sneaky Closing Costs on Your Mortgage
Many first-time homebuyers assume that the “for sale” price listed on their home is the amount they’ll pay. But the selling price of a home is just the beginning, and any veteran homeowner can tell you that there are a good number of additional fees and costs that pop up in the home buying process. Closing costs, for example, are about 2 to 5 percent of the selling price for a home, and while they are unavoidable, there is a surprisingly straight forward way to keep the cost low.
Closing costs, explained
When a potential mortgage lender approves your application, you’ll receive a detailed loan estimate that outlines the exact terms of the mortgage you’re being offered. The loan estimate should include a list of all the fees and closing costs you’ll need to pay before you finalize your mortgage.
These closing costs will probably include:
Loan fees: These are administrative fees charged by your lender for creating and administering your mortgage. They can also be called origination fees, application fees, underwriting fees, or some combination thereof. But basically, this is money paid directly to your lender. It’s important to consider these fees before moving forward with a lender. Some companies do not charge application fees.
Services required by your lender: Your mortgage closing costs could also include fees for a number of professional services that aren’t provided directly by your lender themselves—like a third-party appraisal to determine your home’s value, a professional evaluation for the risk of flooding or fire, and research on the title or tax status of your property.
Arrangements for taxes and insurance: As a homeowner, you’ll be responsible for property taxes, and lenders want to make sure those taxes will be paid. Additionally, lenders generally require homeowner’s insurance to protect the lender in the event that something terrible happens to the home. Depending on the terms of your mortgage and the rules in your state, you may be required to set aside a few months’ worth of property taxes in an escrow account and pay fees for administering that escrow account. Also, if you plan to put down less than 20 percent of the cost of their homes, most lenders will require you pay additional mortgage insurance.
The list above isn’t exhaustive—there may be other miscellaneous fees associated with closing on your new home. For example, if you’re moving into a condo, you’ll probably see Home Owners Association fees listed. Remember, the important thing isn’t so much what the fees are, but that the fees listed make sense. The sheer number of line items may seem overwhelming, but it is important to read through the fine print of your mortgage offer carefully. If you don’t know what a fee is or what it’s for, ask your lender or broker. If they can’t or won’t explain a fee, you may want to find someone else. Also, keep in mind that some fees are negotiable. Lastly, note that several of these closing costs are required or recommended even if you pay cash for your home and avoid a mortgage altogether, however as a cash-in-hand buyer you may be able to get the seller to cover a portion of these.
How to avoid paying too much for closing costs
The trick to avoiding paying too much for closing costs is, conveniently, also the trick for avoiding paying too much for your mortgage: shop around and compare offers from different lenders.
Even though buying a home is probably the most expensive purchase you’ll ever make, many first-time homebuyers make the mistake of only applying for one mortgage loan from a single lender. That’s pretty crazy, considering how often people shop around before booking a flight or buying a new computer. You wouldn’t buy a new TV before doing a few price checks, and your home should be no exception.
The process of applying for a mortgage is time consuming: There’s a ton of paperwork to fill out, industry jargon to decode, and plenty of pressure to sign on the dotted line as quickly as possible.
Even with all that hassle, it’s still worth it to apply to more than one lender. In doing so, you can get a better deal on your interest rates, not only by having negotiating power, but also simply by arming yourself with knowledge about what other lenders in your area are charging.
Keep in mind you can usually expect at least some variation in the pricing for closing fees: Perhaps lender A uses an appraiser who charges $300, and lender B uses an appraiser who charges $250. A lender with higher closing fees might still be the better choice if that lender is also offering you a better interest rate on your mortgage. When we’re talking about a loan that you’ll potentially be paying back over decades, even small differences in the interest rate can add up to tens of thousands of dollars. Let’s say you borrowed $250,000 with a 30-year, fixed-rate mortgage: lowering your interest rate from 5.25 to 4.75 percent would save you $27,500 over the life of your mortgage.
But if one lender in your area is charging a lot more for a particular fee than other lenders in your area, or if you spot a mystery fee that the other lenders don’t seem to be charging at all, that could be a red flag—and with multiple offers to compare, you should be in a good position to spot and avoid unreasonable closing costs.
Buying a home is an exhausting process, but don’t stumble this close to the finish line. Just think, the extra effort you put in now to save on closing costs or reduce your interest rate could fund renovations in the future, eventually upping the sale price on your home if and when you’re ready to go through the process all over again.