So when you're buying a home, the last thing you want to do is pay a bunch of fees and a bunch of costs and everything like that. You already have a down payment and you have closing costs as well, and people get confused with what the differences are. So I'm gonna show you a couple of different strategies you can use to avoid closing costs.
Just know that they have some trade-offs right. If you avoid the cost upfront, they are going to get paid in some way. So first let's clear up what the down payment is versus closing costs.
Your down payment is money that you eventually get back, it's equity in the home. Closing costs or things that you pay to other people that are required for you to purchase a property. So for instance, you're going to pay taxes. You're going to pay insurance. You might pay things like an appraisal fee or a credit report fee.
You might pay a title company. You have all these costs going in that are required to help you close on a deal. These are in addition to your down payment. Plus closing costs added on top. The problem is most people only budget for the down payment and then closing costs become a surprise. So let's talk about some ways that we can whittle these down.
Something to note first is that closing costs need to be paid in some way. They're going to be paid by somebody or in some way they don't just disappear. I can't get the county to waive the taxes that they have on your home. It just doesn't work like that. So they have to be paid in some way. They don't just go away.
So one of the most common strategies is to get the seller to pay the closing cost, and what happens in this is you would negotiate with your realtor, how much you want the seller to pay in your closing costs.
So for instance, if you had a hundred thousand dollars home, you could negotiate maybe 3% of your closing costs. So what would end up happening is the seller would give you $3,000. To pay down your closing costs. So with conventional loans, normally I see this around 3% with government loans. Sometimes you can go up until it's 6% on something like an FHA loan. I have a video on getting seller concessions, if you want to look that up, but basically what people will do.
As they build in the closing costs to the purchase price. So some people ask, can you wrap closing costs into your loan? You can't, but you can do it in a weird roundabout way. So let's run back to this a hundred thousand dollars example. Let's say you're purchasing a hundred thousand dollar house and you need 3%.
Towards your closing costs. The seller doesn't want to give up three grand just so you can save money, right? They want that money in their pocket. So what you can do is make an offer for 103,000, ask for 3000 back at closing, and guess what? The seller, nothing effect gets affected to them, right? They don't have to bring any extra costs to the table and you get the money that you want effectively. You financed your closing costs into the purchase.
So you're basically taking closing costs and wrapping them into the total purchase price of the home. This is the most common way that I see people pay for closing.
Another way is to shop lenders. So when you're shopping for lenders, people do this so wrong all the time. It's really disappointing because I see clients of mine do this and I've lost deals because other lenders quote improperly. So here's the deal. A loan officer should send you a loan estimate when you're shopping around.
The only thing that's going to do. Between lenders is your Section A costs on your loan estimate or what are called origination charges, and these are the charges that the lender requires on the loan. But what I see happen all the time is people are shopping for different mortgages, but Lender A quotes insurance, a lot lower than Lender B does.
Then a buyer says I'm going to go with the lender because their insurance is slower. The lender doesn't provide insurance, you shop for the insurance anyway. The lenders just give you an idea of what they think it could cost. So just because some person says they think it's going to be lower, doesn't mean it's going to be lower than that lender. The lender only changes Section A origination charges. So if you do shop, look for those.
So what you'll run into are things like an underwriting fee, a processing fee, an admin fee you could run into an application fee. What else are you gonna run into? You're gonna run into those types of things along with any points paid on that mortgage.
Another one is if you're really trying to cut costs is to not pay. So points are 1% of the loan amount. So one point is 1% of the loan. So if you have a hundred thousand dollar mortgage, one point is $1,000. What points do is they pay down your interest rate. So it's prepaid interest. So instead of taking a 4% interest rate, maybe you pay one point and your interest rate is 3.875.
Okay, so you paid a thousand dollars to lower it to 3.875%. It may or may not be beneficial for you to do that depending on how long you're going to be in the home. But if you want to save money, just don't pay points. Your rate might be higher, but you're saving that money up front and you can always refinance in the future into something lower when the market changes.
Also, you could wrap your cost into the rate. So this works similarly to points in an opposite way. So some people want to pay money up front to lower the rate, but you could actually increase the rate to receive money at closing. This is what's a lender credit.
Lender credit is basically where you're going to receive money from the lender in turn for taking a higher interest rate, and sometimes this makes sense to do. For instance, let's say you had a 4% rate with zero points. You could take a 5% rate and receive maybe $2,000. So you didn't have to bring $2,000 in closing costs, but you have a higher rate in turn.
This might make sense if you're using something like an FHA loan, normally you can get better lender credits with government loans like FHA, USDA, or VA. It's a little bit more difficult on the conventional side, but you might use it because you're saying, Hey, we're going to use this FHA loan, build up our credit score and refinance into conventional anyway. Now, if that's the case, then we want to pay as little upfront fees as possible. And so what I would suggest in that scenario is great. Go ahead and take the higher rate. Don't pay the costs, refinance and you'll get better on the other side.
You can also wave on the escrows account. Escrows are basically your taxes and insurance. They're set aside in a separate account. So your money that you eventually get back when you sell the property, but that money just sits and collects dust and an escrow account can sometimes be 1, 2, 3, 4, $5,000, depending on what your taxes are like. This is extra money that you're bringing to the closing table that you don't have to. If you waive the escrow account.
Now weaving escrows means that you're going to have to manage paying taxes and insurance on your own. It is not that difficult. I'm amazed sometimes that people who feel like this is very difficult, it's not just setting aside the money that you need for insurance and the money that you need for taxes is not difficult at all.
Normally to waive escrows, you need 20%. However, if you're working with a broker you can shop with a lender that will only require 5% down. I would highly suggest you waive escrows.
Another option is you could shop for your homeowner's insurance. So when you close you're going to have to pay a year of homeowners insurance upfront depending on the size of your property. This could be a little amount of money or a lot of money.
You want to make sure that you're finding a good insurance quote. So you want to have the right blend of solid insurance, but at a solid price as well. Don't go for just the cheapest because it's going to be harder for that to payout. But also don't go for the most expensive either because it's a lot of costs that you have to pay. So you get to shop for that and find what works for you.
Another one is you can get a gift from a family member. So someone who's a close friend for some of those costs. So maybe you don't have the money for closing costs, but you have the money for the down payment. You can get a gift for that money to pay those down.
Also, if you close at the end of the month, you can save money on prepaid interest. So prepaid interest is basically interest that you pay because your first mortgage payment is skipped when closing a home. So for instance, if you close on a home in January, your February payment is skipped and your first payment's due March 1st. So what ends up happening is there's this one payment that's missing. So you pay interest to cover that gap here.
So what ends up happening is if you close at the end of the month, you normally only have to pay one day of interest, but if you close it at the beginning of the month, you have to pay that full month worth of extra interest there. So if you close towards the end of the month, you're going to save probably a couple of hundred bucks on your closing cost.
You could also choose to have an interest credit, which in this example, is basically what you do instead of saying, having your payment due March 1st, have a due February 1st. So maybe you close mid-January, you close in February or, your first payment's due on February 1st and you get an interest credit.
So money back for that interest that you paid early effectively. There are a few ways that you can manage your closing costs and take those down. The easiest way is to have the seller's paperwork. If the seller won't budge, then that's when you can increase the price to wrap those costs into that a little bit.
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