|Ways to tamp down home closing fees
Closing fees are always an inevitable part of taking out a mortgage. The following are little-known tips to minimize the fees when encumbering property:
• Ask for seller credit: In order to finance closing costs in a purchase transaction, the buyer asks the seller for closing cost credit in the offer. Most lenders allow for a 3 percent seller credit. In reality, closing costs will be about 2.5 percent of the sales price. It’s based off the purchase price because the sale value of the home is what the transaction is based on. A seller credit for closing costs means the seller receives a smaller net, meaning money comes out of their pocket.
• Offer more: As discussed above, in a seller credit situation the seller has to agree to a concession. A home buyer who can qualify for financing might be better served offering a higher purchase price, 2½ percent over the list price, giving the seller the opportunity to not lose money. Granted, the house will still have to appraise, but the option remains viable. Essentially, this direction allows the buyer to finance the fees over 360 months (assuming 30-year fixed rate) by virtue of a larger loan amount against a larger purchase price.
• Take out a larger loan: Let’s say you plan to buy a home for $400,000 and have $24,000, which by the way is the total needed to purchase a house at this price. Rather than asking for a seller credit for closing costs, you pay your own fees of $10,000 and the remaining $14,000 (3.5 percent down on an FHA Mortgage for example) gets you in. Granted, the loan amount is $10,000 bigger, but the strength of the offer remains intact because no concession was requested. In a refinance loan, it’s simply increasing the amount borrowed, thereby incorporating the fees into the loan amount.
• Select a higher rate: Call lender credit. It’s the same way a no-cost refinance works. You agree to take a higher mortgage rate in exchange for a monetary concession towards closing costs. It’s not uncommon for a lender to offer a fee credit anywhere from few hundred to a few thousand dollars, taking a chunk away from cash financing the fees. The flip side is paying a higher interest rate over the term of the loan, which in the end will cost more in interest.
Cost of money
In short, financing creates a higher cost loan, no two ways about it. Consider this, it’s an extra $43,088 more in interest over 360 months if you take a lender credit for $3,000 in exchange for a 4.875 percent interest rate, when 4.375 percent is available without a lender credit-assuming a $400,000 loan amount. A spread of .5 percent in rate for a lender credit in the neighborhood of $3,000 is realistic at today’s mortgage rates.
The more in interest rate and/or loan amount creates larger interest expense over time, assuming the loan is not refinanced (which by the way most are every three to five years). The more purchase paid for the home also creates higher property taxes. Why? Property taxes are based on a portion of the sales price of the property and the subsequent assessment with your local county ensues based upon that price. Assume about 1.25 percent of the purchase price for yearly property taxes.
While financing closing costs can solidify your ability to close the transaction. In the decision-making process, be sure to comparatively look at your individual advantages and disadvantages of financing the closing costs. Closing costs are assessed every time the property is encumbered (financed). Expect closing costs on purchase transactions around 2.5 percent of sales price and on refinance transactions to be 1 percent of the loan amount.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.