Closing costs can run into thousands of dollars, usually 2% to 3% of the price of the home. For a home priced at $300,000 buyers will have to come up with $6,000 to $9,000 at settlement. One way buyers can avoid high closing costs is to have a hefty down payment. For a home listed at $350,000 in the Boston area town of Brookline (with the required 20% down payment for a conventional loan) buyers will need to have $8,400 if the closing costs are 3%. If buyers can put 30% down, the closing costs come down to $7,450. Not only does a larger down payment save buyers on closing costs, but the principal of their loan is smaller saving them more money in the long run.
Many home buyers, especially first time home buyers, have a hard time coming up with a larger down payment or closing costs. They may qualify for a mortgage with good credit, but their cash on hand is short. There are some creative ways to save on closing costs. They take the cooperation of the lender and the seller, but they can save home buyers money and give them a chance to get into the home of their dreams.
Ask the seller to pay closing costs. Today’s home market is very sluggish and sellers may be willing to carry the burden of closing costs to unload their house.
Include the closing cost in the mortgage. Some lenders will roll the closing costs into the mortgage. This only works if the buyer qualifies a loan which is greater than the price of the home. For example if a buyer is qualified for a $400,000 mortgage and the price of the home is close to this amount, closing costs ($9,600 after 20% down and 3% closing costs) may push them over their limit.
Get the seller to agree to a “seller concession”. For this approach to work, the amount of the mortgage must be more than the value of the house. The seller must agree to accept the higher value and then pay the buyer back for the difference. The buyer then uses this money to pay the closing costs.
The lender pays the closing costs. Sometimes the lender will pay the closing costs, or at least part of them, in exchange for a higher interest rate.
Take out a separate loan. Buyers may want to take out a separate small loan to cover closing costs. One disadvantage of this route is buyers will make payments on the closing costs plus interest.
If home buyers can’t afford to pay closing costs out of pocket on the day of settlement, these creative ways to help avoid or come up with the closing costs, may help them be able to afford the home of their choice. Each method has it’s pros and cons, and buyers must look closely at their options before they decide which one is right for them.