Justin D. Vrobel

What are Closing Costs?

When someone is planning on buying a home, one of the first questions asked is, how much do I have to put down? This is a great question to ask because you need to prepare but there are also additional costs to purchasing a home besides just the minimum down payment. (There are strategies for reducing or eliminating the closing costs that we will discuss in other posts). 

Who pays for which closing costs is different depending on where you live but, in this section, we will be discussing the closing costs normally paid by the buyer in this area. The amount of closing costs is also dependent the price of the home and loan type. Closing costs are broken down into 2 types of closing costs, non-Recurring closing costs and Recurring closing costs. 

Non-Recurring costs are considered the “cost” of completing the transaction. These are one-time fees made up of loan processing/admin fees and all of the costs associated with Escrow/title. Some examples of these would include:

•        Credit Report fee

•        Loan Processing fee

•        Underwriting fee

•        Discount Points

•        Appraisal fee

•        Escrow fee 

•        Title Insurance

•        Recording fee

The one-time nature of these costs are why they are called non-recurring because they only occur one time. 

Recurring closing costs are the costs you have to pay for during the ownership of the property, and at time of closing you are required to pay a portion of these costs. These would include:

•        Property Taxes (up to 9 months if you have an impound account)

•        Hazard/Flood Insurance premium

•        Prorated interest 

In addition to the down payment, these closing costs should be factored into your home purchase. Your lender will be able to give you further information and help guide you on the best path forward.

Ways to Reduce Closing Costs

Closing costs are a part of every real estate transaction. Here are several ways to reduce or mitigate entirely, the additional costs when purchasing a home.

1.      Seller Credit towards closing costs

When purchasing a home, there are many items that are negotiated, not just the purchase price. The purchase price tends to be the area most people focus on, but there are other ways to get value as a buyer besides a reduction in the price paid. One thing you, as the buyer, can request is a seller credit, specifically to pay for closing costs. Sellers are limited on the ways in which they can give back compensation to the buyer. One area that is allowed is the ability for them to give money back to pay for the buyer’s closing costs. Negotiating this would reduce the total amount of money needed to buy the home, allowing the buyer to keep more money on hand after the purchase.

This negotiating tactic can be used as a benefit to the buyer, by giving a credit instead of negotiating a lower price paid, or it can be used to help a buyer purchase a home when they don’t have enough money by increasing the purchase price and still giving the credit.

For example: (buyer’s market)

The home is priced at $600,000. In a buyer’s market, the buyer will have more leverage and could negotiate a lower price. Instead of negotiating a price of $590,000 and still paying the closing costs, the buyer could propose to pay the $600,000 but instead get a $10,000 credit to pay closing costs or to buy the interest rate down.

Another example: (seller’s market)

The home is priced at $600,000. If the buyer does not have enough money for the additional closing costs, they could offer to pay $610,000 and receive $10,000 back in the form of a seller credit.

There is a limit on how much can be given as a seller credit, up to 3% if putting less than 20% down and up to 6% if putting 20% down or more.

2.      Lender Rebate

Another way to reduce closing costs is to get a rebate from the lender. When discussing your interest rate with the lender, you will be presented with several options. You can choose to go with the rate that has no cost and no rebate. You can also choose to buy the interest rate down in order to get a lower interest rate. The third option is you could go with a higher interest rate and in return the lender will give you a rebate that would be used to reduce the amount of the closing costs.

3.      Grants and assistance programs

States and counties will offer programs and grants that can assist in paying the down payment and closing costs of purchasing a home. They differ by state and by county so you will want to discuss those options with your lender.

4.      Closing your transaction at the end of the month

Some of closing costs that are paid are correlated with the time of the month in which you close. Primarily the per diem interest. Because interest is paid in arrears (backward), when your mortgage payment is made every month, the interest portion is paying the interest for the preceding month. For instance, a June 1st mortgage payment will cover the interest for May. Therefore, at time of closing, the buyer is responsible for paying the interest from the day of close to the end of that current month. By closing at the end of the month, the amount of per diem interest that is paid is lowered.

As always, discuss all of these options with your lender and real estate agent as it is best that everyone is on the same page when negotiating your future home purchase.