Closing costs can be a bummer.
At an average of 2% to 5% of your loan amount, they can easily creep into the tens of thousands. If you're an investor buying multiple properties every year, that can equal serious cash over time.
Fortunately, closing costs aren't set in stone. Not only do they vary by lender and bank, but there's also a lot of wiggle room in negotiating them.
Are you prepping to buy your next investment property? Wondering how to reduce closing costs when you do? These strategies can help.
Shop around for your mortgage lender
First and foremost, you need to look at several mortgage lenders. Every lender has different fees, and you can save thousands just by choosing one over another.
Aim to get at least three mortgage loan quotes (more is always better), and make sure each one gives you an official loan estimate. This makes comparing your closing cost options a lot easier. You should also apply within the same day or two (so market conditions are similar) and be sure to include a wide mix of institutions, including banks, credit unions, and online lenders.
When looking at your estimates, check out the loan origination fee, underwriting fee, and any processing fees under the "Origination Charges" portion of your loan estimate. This is where lenders tend to vary the most and where you'll likely find the most potential savings (aside from your interest rate).
Consider using your own bank or credit union
Always get a quote from your personal or business bank, too. Some places offer rebates, discounts, and loyalty rewards for existing customers. They might even waive some fees entirely or give you a reduced interest rate.
Keep in mind that even with these discounts or a lower interest rate, your bank still might not be the best choice for a home loan. This is why it's critical to have other lenders in the mix as well.
Check your loan estimate for other services you can shop around for
Go ahead and consider this section your to-do list. Any services listed here are ones you should comparison shop for. Contact several vendors, get their fees, and try your hand at negotiating them down a bit. You can always bring the quote from one vendor to the next and see if they can beat it.
(Just a heads up: Things like the appraisal fee, escrow fee, attorney fee, and recording fee are usually non-negotiable, unfortunately.)
Steer clear of using discount points to get a lower mortgage rate
Discount points can be valuable if you're going to own the home a while, but if you're just going to flip the property and sell it in the next few months, then they're probably not worth the money.
You should also take into account what market rates look like before considering a mortgage point. As of mid-2020, interest rates are at record-breaking lows, so paying thousands of dollars just to knock off a fraction of your rate might not be the wisest move. You're likely better off putting that toward your down payment or remodeling the house.
Negotiate, negotiate, negotiate
As with any service, you can always negotiate -- or at least attempt to. You'll likely have the best luck negotiating the lender-side fees, as these are the ones they actually control in-house. These include things like the origination fee, underwriting fee, application fee, funding fee, and credit report charges.
Once you have your quotes, pick the loan estimate with the lowest lender fee total and show it to the other lenders you're considering. There's a chance someone may match or even beat those prices. They also might offer you a lender credit to sweeten the deal.
Choose a closing date late in the month
Your timing plays a big role in your closing costs. If you buy at the beginning of the month, you'll have to prepay interest for each remaining day of the month, as well as prepay your property taxes, mortgage insurance, and homeowners insurance, too. That can add up quick, tacking on thousands in extra closing costs once all is said and done.
Your best bet is to ask for a closing date at the end of the month, when your prepaid interest and fees will lower. Just make sure the seller is okay with a further-out closing date before you do.
See if the seller or your real estate agent will contribute
There's always the chance the home's seller is willing to cover some of your closing costs -- especially if the market is slow or they're really motivated to sell the property (maybe they've already moved or bought a new place). Either way, it can never hurt to ask.
If the seller does agree to cover some of your costs, this is called a "seller credit" or “closing cost credit” and will show up on your final closing disclosure, reducing your overall cash-to-close amount.
In some cases, your real estate agent may be willing to contribute some, too. A buyer's agent gets a pretty hefty commission when they help you close the deal, so a few hundred dollars usually isn't a huge ask. They'll be even more likely to help out if you give them regular business or send referrals their way.
Finance some (or all) of them
Some lenders may let you roll your closing costs into the loan balance and then pay them off over time. The big disadvantage here is that you'll pay more in interest costs to do so. Your monthly payment will be higher, too.
If you're planning to flip the house pretty quickly, these drawbacks might not be such a big deal. Just make sure your loan balance isn't so high that you can't turn a profit on the property (or worse, that you'll go upside down on your mortgage).
The bottom line on closing costs
Mortgage closing costs can get expensive, but you don't have to take them lying down. There's always room for negotiation as a home buyer, and timing your purchase properly can help a lot, too.
The biggest thing you can do to reduce closing costs, though, is to shop around -- for your lender, for your title company, and for anything else you're legally allowed to. Make sure to get several quotes for every fee, and don't be afraid to push back and negotiate if you think someone's costs are too high.
It might seem like a huge hassle to wheel and deal for every individual charge, but the more you save on closing costs, the more you have to put toward remodeling the property or prepping it for renters. It means more in the bank for future investments, too. And isn't growing your business the whole point?
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