The Importance Of Budgeting
Creating a realistic budget in advance and sticking to it can help you be more confident at the closing and avoid unexpected surprises down the road. The more you can map outâand spread outâyour expenses and payments, the more effective you will be in managing your overall costs. But before you can put together an accurate budget, you need to know how much you can afford.
Another budgeting tip you may want to consider: Many real estate and mortgage experts recommend setting up a separate account to help you more easily manage funds earmarked for closing and moving costs.
Appeal To The Seller For Help
You might be able to get a seller to either lower the purchase price or cover a portion of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. In many hot housing markets, though, conditions favor sellers, so you might get pushback or a flat-out no if you ask for a sellers help. But it doesnt hurt to ask.
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What You Need To Know About Closing Costs
During closing, youll need to review and sign loan and other paperwork to finalize the home purchase process, as well as pay some upfront costs.
- Your closing costs, which will depend on your lender, type of mortgage, and home location, may cost thousands of dollars theyre typically 2 to 5% of your home purchase price.Estimate your costs.
- Closing costs can be paid by you, the home seller, or the lender.
- You may be able to use monetary gifts from family for all or a portion of your closing costs.
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Deduct Closing Costs During Tax Season
Despite what you might have heard about all closing costs being tax-deductible, the truth is that most are not. However, there are a few that may apply to you, and the tax deduction could be substantial.
If you want to deduct your closing costs, you wont be able to take a standard deduction. To deduct the following costs as a buyer, you will need to use a Schedule A for itemizing your deductions.
- Property taxes: You may be able to deduct property taxes you paid at closing.
- Mortgage insurance premiums: Mortgage insurance premiums that you prepaid may be deductible.
- Discount points: If you pay for discount points to lower your mortgage interest rate, these may be tax-deductible.
Though you may be able to deduct some of your closing costs come tax season, you may not want to rely on that deduction to significantly lower or avoid your closing costs altogether.
Do You Have To Pay Closing Costs When Refinancing
The good news is that some closing costs are negotiable, especially the fees charged directly by your mortgage lender. These include the origination, application, and underwriting fees.
However, your lender wont be able to lower fees charged by third parties such as the survey, home appraisal, or recording fees. Lenders simply pass these fees along to you, the consumer.
You should always get multiple mortgage quotes from at least three lenders, including your current mortgage company. Then compare your Loan Estimates to find the lowestcost option.
Comparing upfront fees and interest rates can help you save money. And if you find a lender with a cheaper loan origination fee, application fee, or underwriting fee, this sways the negotiating power in your favor.
You can refinance with the lender offering the lowest rate and fees at face value. Or you can use your other offers as leverage for negotiation.
Your current lender might match the competitors fees or waive certain refinance costs to keep you as a customer.
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Can Closing Costs Be Included In A Mortgage
The short answer is yes, you can finance your closing costs. This doesnt mean youre not paying them. It just means youre not paying thousands of dollars upfront when you close on your new home. After a large chunk of your savings goes toward a down payment, financing your closing costs may seem like an appealing financial move.
If you live in your home for only a few years or youre able to pay your loans off quickly, then rolling your closing costs into your mortgage might be a worthwhile option.
For many home-buyers, however, paying closing costs over the long run may actually end up costing you more than if you had paid your closing costs in cash upfront. Your lender may also not allow rolling in closing costs with your mortgage, so if you want to pursue this payment avenue, be sure to first discuss it with your lender.
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Look Into A Va Refinance Loan
If you have an existing mortgage backed by the Department of Veterans Affairs, or VA, you can refinance with the Interest Rate Reduction Refinance Loan , which typically does not require a credit score or appraisal. Plus, theres no annual cost to guarantee the loan. You can refinance up to 100% of the propertys value with a VA loan. Youll have to go through a private bank, mortgage company or credit union to get this VA loan.
How Can Home Buyers Avoid Closing Costs
You can also avoid upfront fees on your loan by getting a no-closing cost mortgage, in which you dont pay any of the closing costs when you close on the mortgage.
Typically, when a lender offers a deal like this, it does end up costing you in the long run: The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs.
Finally, home buyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyers closing fees.
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How To Avoid Closing Costs When Refinancing
Lenders can offer no-closing-cost loans because they can roll the costs into the loan balance or interest rate. This saves you money upfront but may cost you more in the long run. There are a couple of tactics you can use to reduce your closing costs in the first place.
First, you can ask the lender to waive some of the fees. If youre a loyal customer who makes payments on time, the bank may be willing to cut you a break to keep you as a customer. In particular, you may be able to get the lender to waive your appraisal fee if you had an appraisal performed recently.
You can also comparison-shop for the best deals on third-party services to cut those fees, then negotiate the closing costs downward.
Aside from those tactics, raising your credit score and reducing your debt-to-income ratio will lead to a better interest rate, which helps you offset the increased loan balance or interest rate on a no-closing-cost refinancing loan.
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What Are Closing Costs For A Mortgage And How Much Are They
Closing costs usually amount to around 2% to 5% of the cost of your home loan.
Alix is a staff writer for CNET Money where she focuses on real estate, housing and the mortgage industry. She previously reported on retirement and investing for Money.com and was a staff writer at Time magazine. She has written for various publications, such as Fortune, InStyle and Travel + Leisure, and she also worked in social media and digital production at NBC Nightly News with Lester Holt and NY1. She graduated from the Craig Newmark Graduate School of Journalism at CUNY and Villanova University. When not checking Twitter, Alix likes to hike, play tennis and watch her neighbors’ dogs. Now based out of Los Angeles, Alix doesn’t miss the New York City subway one bit.
When buying a new home, many people focus on how much of a down payment they’ll need to secure a mortgage. But you also need to factor in the additional expenses that come with the transaction — including closing costs.
Closing costs refers to the assortment of fees you must pay to your mortgage lender when closing on your home. They’re due when you finalize your mortgage and take over the property title. They usually range from 2% to 5% of the amount you’re borrowing, and will add up to thousands of dollars. Most are paid by the buyer, but the seller may be on the hook for a few charges, too.
Closing Costs Vs Down Payment
People often assume that their down payment covers closing costs. Though you may make your down payment at closing, these are two completely different payments.
Your down payment is paid to the seller of the house closing costs are paid to the lender, real estate attorney, title company, and other third parties involved in your real estate transaction.
What you put down on the house goes towards the overall purchase price. For example, if you put $60,000 down on a $300,000 home, youâll only need to finance $240,000. Closing costs, on the other hand, are not included in the purchase price of the home. They are an additional amount that must be paid in full upfront.
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Homeowners Association Transfer Fee
Your homeowners association transfer fee covers the cost of moving the burden of HOA fees from the seller to the buyer. It ensures that the seller is up to date on their HOA dues. It also provides you with a copy of the associations payment and due schedule as well as their financials.
Most of the time, the seller covers this cost. However, you might need to pay for your own transfer fee if youre buying in a very competitive market, or if you agree to cover all closing costs.
The amount youll pay for your transfer depends on your HOAs policies. If you live in an area without an HOA, you wont pay this fee at all.
First Off What Are Closing Costs
Lets make sure we define closing costs before explaining how they can be paid. Closing costs are kind of like taxes, for lack of a better term. Lets say youre at the store looking to buy a shirt. The shirt may be fifteen dollars, but when you check out, youll probably end up paying sixteen or seventeen dollars. Why? Because there are closing costs associated with the purchase in this case, wed refer to them as taxes. Closing costs are just like a sales tax. When you go to get a mortgage, there are certain unavoidable costs associated with approving and processing your loan, such as origination fees, points, taxes, insurance, title fees, and appraisal fees, to name a few.
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What Fees Or Charges Are Paid When Closing On A Mortgage And Who Pays Them
When you are buying a home you generally pay all of the costs associated with that transaction. However, depending on the contract or state law, the seller may end up paying for some of these costs.
Even if you dont pay the mortgage closing fees directly out of pocket, you might end up paying them indirectly. Sometimes, you can negotiate with the seller for a credit towards your closing costs, but the seller will usually require you to pay a higher price for the home in order to cover the costs of this credit.
Youre still paying for these coststhey are just paid through your loan instead of paid out of pocket. The lender may also offer to give you a credit to help with your closing costs. This credit isnt free either. Typically, the lender will either increase your loan amount to cover these costs, or charge you a higher interest rate in exchange for the credit.
Common closing fees or charges may include:
Increase Your Interest Rate In Exchange For A Credit
Some loans will allow you to increase your interest rate while giving you a credit that offsets some or all of your closing costs. However, keep in mind that this means youll be paying more on all of the money you borrow for the entire life of the loan .
If you hear about zero-down loans, they often work this way. The lender covers your closing costs in exchange for a higher interest rate. Theyre not usually the fantastic deal they seem to be.
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Is Rolling Closing Costs Into Your Loan The Same Thing As A No
Rolling closing costs into your mortgage is usually not the same thing as a noclosingcost mortgage.
Generally, when lenders advertise no closing cost or zero closing cost mortgages they are referring to the process of trading a slightly higher interest rate in return for a lender credit.
A lender credit means the mortgage company will cover part or all of your closing costs.
With these mortgages, the lender will front many of the initial closing costs and fees, while charging a slightly higher interest rate over the duration of the loan.
The downside is youll pay a larger monthly payment over the long haul. And, youre likely to pay significantly more in interest overall.
However, the idea is that you dont have to come up with as much cash up front. This can be helpful when you are also having to come up with a large down payment.
Ways To Pay Mortgage Closing Costs
- Pay them yourself with your own funds at closing
- Use a lender credit to offset some or all the fees
- Use a credit from the home seller or real estate agent to cover fees
- Roll fees into the loan balance and pay down over time with the mortgage
The good news is youve got plenty of options when it comes to paying your closing costs.
As seen in the illustration above, there are a variety of different ways to handle the many costs associated with a home loan.
You can pay them yourself, use a credit from the lender and/or real estate agent, or ask for a seller concession in exchange for a slightly higher purchase price.
Theres also the option of rolling the fees into the loan amount, lender permitting.
Be sure to give it some thought before just going with whatever the real estate agent or broker/lender tells you to do.
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Real Estate Agent Commission
Sellers usually pay for both the buyers and the sellers real estate agent commissions. Real estate commissions may vary, but the average rate is 5% 6% of the total loan value. The buyer’s agent and the seller’s agent split the fee evenly.
If you buy a home without an agent, remember to write into your offer letter that youre proposing a lower rate in exchange for no agent commission. Sellers consider commissions when they price their home.
Without an extra commission fee, you might have more room to negotiate your home’s price. If you buy a home without an agent and dont tell the seller when you make the offer, the sellers agent may pocket the extra money.
Gst On New Home Purchases
Remember how I mentioned that land transfer taxes didnt apply to newly built homes? Well, that doesnt mean that you can escape paying tax when closing on new construction. Far from it, actually. New home purchases are subject to GST . If the home builder has included the GST into the purchase price, you may finance this amount with the mortgage. If not, it becomes part of your closing costs.
Lets say you live in BC, and youre purchasing a brand new condo for $600,000. With a GST of 5%, youll be responsible for paying $30,000 upfront.
You may be able to claim a partial GST rebate on your income tax, depending on the purchase price of the property and whether or not its your primary residence.
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