Whether you’re securing a mortgage for refinancing or purchase, there are several costs you have to keep in mind.
Many parties, including attorneys and the best mortgage lenders in Dallas, have performed services throughout the home buying process. Mortgage closing costs cover these service providers’ fees before you seal the deal.
Our today’s guide on mortgage closing costs will answer all the questions you have in mind about closing costs, how much you will have to pay in closing, and some of the most effective ways to reduce these costs to finalize the real estate transaction.
So, let’s begin…
Mortgage Closing Costs Explained
By definition, closing costs are the “expenses you pay” when you reach the final stages of your home buying process. Mortgage closing costs typically range from 3% to 6% of the total home price. This means if you have purchased a house worth $300,000, your closing costs could vary between $9000 to $18000.
But this is obviously just a rough estimate of how much mortgage closing costs you have to pay on average. The exact figure depends on the type of loan, your location, and the agreed-upon terms and conditions between you and those third-party service providers.
What is Included in Mortgage Closing Cost
Closing costs can be divided into two types – recurring or non-recurring closing costs. Recurring costs, as their name implies are recurring/repetitive in nature, such as insurance, taxes, interest, etc.
Then we have non-recurring/one-time costs. These include lender fees, appraisal fees, transfer taxes, discount points, etc.
Here’s the list of some standard closing costs you can expect to pay before you receive keys to your new house and move there:
Application fee: An application fee is charged by the lender in order to process your loan application. You have to get in touch with your lender to discuss what they charge to process and push your application further.
Credit report fee: Mortgage lenders have to fetch your credit reports from three authorized bureaus and they usually have to pay a fee to get them (that they eventually charge from the home buyers). The fee typically ranges from $15 to $30. Some mortgage lenders might not charge this from you provided they get a discount or a waive from the reporting agencies.
UPMIP: All FHA loans come with a requirement of UPMIP, which is basically the short form for upfront mortgage insurance premium.
This is basically 1.75% of the total base amount that a borrower has to pay at the time of closing.
Some FHA loans also require you to pay an annual MPI but this depends on the type of loan you have applied for and the base amount.
Flood inspection fee: This is a fee that you have to pay in order to get your property inspected by a flood inspector to confirm if it is in the flood zone. Here it is important to understand that this fee is separate from your general homeowner’s insurance policy.
Homeowner’s insurance premium: You may have to pay your first year’s homeowner’s insurance premium at the time of closing.
Title insurance: This is the type of policy you may need to protect against claims of ownership you may receive after buying a property. This is optional but most lenders recommend it to ensure you get an additional layer of security.
Besides that, some other types of closing costs include PMI, Property tax, Transfer fee, Underwriting fees, VA funding costs, among others.
How to Reduce Your Mortgage Closing Costs
Buying a new home is an expensive affair. The last thing you want is to pay exorbitant charges and fees at the time of closing. Fortunately, there are several ways you can avoid or reduce your mortgage closing costs. We’re going to shed light on a few of them down below:
- Pay in cash
We know this isn’t an option for most buyers. But if you can afford it, paying cash for your home will save you a lot in terms of closing costs.
- Shop around and negotiate
Did you know you can save a lot of money by comparing lender’s fees and third-party service charges? Remember, you don’t always have to go with the recommendations of your lender. Shop around and search for options that are more affordable and value-driven.
- Close at the end of the month
You can also save money by simply scheduling closing at the end of the month. This will help reduce the payment for daily prepaid interest charges. Wondering how much exactly can you save this way? Simply, multiply your loan amount by a rate of interest. Now, divide the total by 365. Now multiply the result by the number of days left in that specific month.
- Skip discount points
There are lenders who let borrowers prepay interest on their loans. As a result, the borrowers can enjoy a lower interest rate on their mortgage. This is also known as the buying of interest rates in the world of financing. Buying down the interest rate can fetch a number of benefits in the long run as it can help reduce the total amount of interest paid over the life of your home loan.
- Ask the seller for the help
You may also ask a seller to contribute money towards your closing costs. However, this option can only work when the seller is looking to sell their property urgently or if they don’t have as many offers as they need to take the action.
- Choose a loan type that doesn’t require a mortgage insurance
Some loan types cover the cost of mortgage insurance by default. For example, a conventional mortgage doesn’t need a buyer to pay separately for the mortgage insurance once they have paid a 20% downpayment on their loan. Hence, you can look for such loan options that do not ask you to pay extra for insurance.
The Bottom Line
We shared some of our tried and tested tips to help you avoid or reduce your mortgage costs. The good thing is almost all closing costs are negotiable. This means you can easily control or reduce them by using good negotiation skills.