Easing the Pain of Closing Costs
Sunday, August 23, 2009
Closing costs for a home average 3 percent of the purchase price -- and go as high as 6 percent in higher-tax areas. Plus, for most loans, you must come up with at least a 5 percent down payment. But you can use the following strategies to reduce the pain.
-- Have the seller pay. You can hit up the sellers for some or all of your closing costs. You even get a tax break for mortgage points the seller pays (each point is 1 percent of the loan amount).
Be careful, though. If the sellers have already slashed their price to the bone, they may tell you to take a hike. If the sellers won't play ball and you don't have enough cash for closing -- but you can afford a larger mortgage -- it may make sense to bump up the price you pay for the home and have the sellers use the extra money to pay closing costs for you.
Note that there are built-in limits to a seller's generosity: Freddie Mac and Fannie Mae allow sellers to pick up closing costs worth 6 percent of the purchase price for loans with 10 percent or more down, the Federal Housing Administration allows up to 6 percent, and the Department of Veterans Affairs allows 4 percent.
-- Shop loan terms. The "no-cost" mortgage, which rolled most closing costs into your interest rate, has largely disappeared, and lenders have resurrected fees for everything, says Guy Cecala, publisher of Inside Mortgage Finance. Charges vary dramatically, so it pays to shop and negotiate all the loan terms, not just the rate. Cecala says borrowers have regained muscle as the market has become more competitive.
Call three or four lenders for their best rate (preferably without points) and an estimate of their fees (excluding third-party charges and escrowed amounts for taxes and insurance). Apply with the lender that's offering the best deal to get a good-faith estimate. If you're willing to pay more than one application fee, get two estimates and play the lenders against one another.
-- Pay less for PMI. If your stake in a home is less than 20 percent, you must ante up for private mortgage insurance. Monthly premiums for PMI are typically 0.5 percent to 1.5 percent of your loan amount per year, depending on how much equity you have, your credit score and whether you get a fixed-rate or adjustable-rate loan.
You could negotiate with the seller to pay a single premium upfront, or you could roll that single premium into your loan. For a 30-year fixed-rate loan with 15 percent down for a $250,000 home in Fairfax County, the upfront cost of PMI would be $3,506 (using rates from mortgage insurer MGIC). Adding that amount to the mortgage would add $19 a month to the payment, but that's $68 less a month than you'd pay with the smaller mortgage and monthly PMI premiums.
-- Find cheaper title insurance. Title insurance protects against challenges to your ownership, with separate coverage for your lender and for you. But as much as 80 percent of the premium goes to paying commission to a title agent. Shop around for title insurance.