Reduce Closing Costs on Your Home Loan

buying-house-keysWhether you're buying a home or refinancing your existing mortgage, the process of obtaining a home loan can be confusing and daunting. This is especially true when it comes to the laundry list of fees associated with getting a mortgage.

It can be very difficult to understand all the fees and closing costs, not to mention whether or not you're being overcharged.

Shopping around for the lowest closing costs could potentially save you tons of money.

Before getting into ways to save on closing costs, let's identify how closing costs are derived.

What are closing costs?

Closing costs are the costs or fees associated with obtaining a home loan.

Mortgage closing costs typically fall into three categories: lender fees, third-party fees and prepaid funds for insurance, property taxes and interest.

Closing costs can vary by geographic location. Typically, home buyers can expect to pay between about 3 to 4 percent of the purchase price of their home in closing fees. So, if you're buying a home for $200,000 you might pay between $6,000 and $8,000 in closing costs.

A closing cost calculator can be helpful when trying to figure out how much closing costs are going to be, and how to cover closing costs.

When purchasing a home, these fees are typically paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer, the seller or both.

When refinancing, the fees are usually very similar to those you would've paid when purchasing your home. You'll typically pay slightly less fees when refinancing for reasons such as one-time fees like owner's title insurance. Although you have the option to pay them at the closing, most homeowners opt to roll closing costs into the loan when refinancing.

So how can you save on your mortgage closing costs? Here are nine helpful tips:

1. Determine which services can be shopped, then shop around

Most people know to shop around when it comes to mortgage rates. But you shouldn't stop there.

The Loan Estimate details which "Services You Can Shop For" and which "Services You Cannot Shop For". For example, while you can't shop around for appraisal fees, you can shop title insurance and pest inspection fees.

Although lenders aren't required to provide an estimate before you apply for a loan, you should be able to get some ballpark figures when it comes to closing costs. Getting quotes from more than one lender is the number one piece of advice when it comes to mortgage shopping.

Speaking to local lenders is very important, especially when it comes to comparing closing costs.

2. Know which fees can change

Many would-be and current homeowners don't know that certain fees listed on your Loan Estimate are locked in and others can change.

If you use a company recommended by your lender, your title services, lender's title insurance and owner's title insurance can't increase by more than 10% at closing. However, if you chose to use service providers not listed in the Loan Estimate, there's no limit on how much the costs could rise.

Closing costs have gotten clearer since the Loan Estimate replaced the GFE, but it's still worth reviewing your Loan Estimate carefully.

3. Save on discount points when mortgage rates are low

Homeowners and buyers have the option to pay discount points in exchange for a lower interest rate. However, experts say paying points may not be worth it when mortgage rates are already low.

"I would suggest not buying down an interest rate," says Mark Hanley, a mortgage officer in Austin, Texas. Paying upfront discount points can seem unnecessary when rates are really low already, he says.

However, Keith Gumbinger, vice president of HSH.com, says there can be valid reasons to pay points when mortgage rates are low, especially if you plan on remaining in the home for a long stretch.

Speak with your lender about whether or not paying points makes sense based on your situation.

4. Be leery of significantly higher or lower estimates

Although closing costs can vary by state, most third-party fees should be somewhat comparable.

If you receive a quote that has a third-party charge that is much higher or lower than the average charge, you should ask about it. Be sure that you are satisfied with their answer before you choose to use them as your lender or title insurance provider.

5. Shop and compare homeowner's insurance

Moira Vahey, spokesperson for the Consumer Financial Protection Bureau (CFPB), says even though the CFPB recently issued rules that "provide consumers with options to avoid costly force-placed insurance," the best way to avoid pricier insurance is to shop around.

It'll reduce your closing costs and save you money long-term on your insurance premiums.

To review a list of home insurance carriers, visit Insure.com and search for "best insurance companies." Your lender can typically provide recommendations for insurance companies as well.

6. Ask the seller to pay for some or all closing costs

If you're buying a home and you're tight on cash, you can always ask the seller to help pay for part or all of your closing costs.

Getting help from the seller isn't easy in a hot seller's market. However, if the seller is motivated enough to make the transaction, you may save some money on closing costs in the process.

Check with your real estate agent for advice on if you should negotiate closing costs with the seller. Typically, rather than asking for certain services to be paid, it's best to request a specific dollar amount.

Bear in mind that certain loan programs have limits on how much the seller is allowed to contribute. Ask your lender if there are limitations based on your loan.

7. Be careful with no closing cost mortgage offers

No cost home loans aren't new. Most mortgage companies offer different variations of no closing cost mortgage loans.

Be aware of the "catch" that comes with a no cost mortgage.

No cost mortgages are done by exchanging a higher interest rate for a lender credit. The lender credit is then applied to your closing costs. While this can be a good option if you're tight on funds, it can also cost you more over the long haul depending on how long you live in your home. The best way to pay mortgage closing costs will depend on your time frame and your finances.

8. Close at or near the end of the month

Prepaid interest is one of the fees that come into play when buying or refinancing a home. Closing toward the end of the month can save on prepaid interest.

With a new home loan, you need to prepay interest that accrues from the closing date to the end of the month.

For example, if you close on July 11, you'll have to pay for 20 days of interest. On a $200,000 loan with a 4.5% mortgage rate, that's almost $500. By closing on July 30, you'll only pay interest for July 30 and 31. Using the same loan amount and interest rate, two days of interest is only $49.

You can save hundreds of dollars, even thousands, by understanding how you to save on closing costs. That money could be better spent going into your home, as opposed to on your home loan.

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