How can I save on closing costs when buying a home?

Question

A quick google search shows that closing costs on a home end up being around 2-5% of the purchase price of a home, which adds up to thousands of dollars. Assuming I'm willing to do my homework and I'm a fairly competent person, what are some of the ways I can cut expenses on closing costs? Is there any low-hanging fruit?

For example: do I need a realtor, or can I do their job myself? Do I need to pay for an inspection, or am I likely to save enough money from skipping it to cover potential problems that they would have caught?

Let's assume I'm in no hurry to enter the market (1-3 years), but I'm looking for a house around $200K to $250K.

Answer 1

For example: do I need a realtor, or can I do their job myself?

In general in the United States the real estate agent fee is paid by the seller of the property. Their agent will be more than happy keep the entire fee if they don't have to split it with your agent.

If you don't have an agent you will be missing somebody who can help you find the property that meets your needs. They can also help explain what the different parts of the contract mean and give you advice regarding making an offer.

Do I need to pay for an inspection, or am I likely to save enough money from skipping it to cover potential problems that they would have caught?

Inspections are optional. Though the amount you are risking is the entire value of the purchase. If the property has a problem in the foundation, or the septic system, or the plumbing or electrical the cost to fix the issue could render the purchase not worth doing.

If you discover the problem a year later and you have to repair the house and have to find temporary housing for a few months, you will regret skipping the inspection.

What are some of the ways I can cut expenses on closing costs? Is there any low-hanging fruit?

You need to do your homework. When you are ready to purchase a property take good look at the good faith estimate and look at each item.

• There are some you can't avoid: the county/city charges a fee to record the transaction. The government sets the rate.
• There are some that are hard for you to do: file all the paperwork with the government, mess it up and you could put the deal at risk.
• There are ones the lender requires: title insurance, fire insurance.
• There are ones that depend on the time of the year or the time of the month: property tax escrow, the first mortgage payment.

Ask them what the expense covers. Push back against those that seem optional or excessive.

Keep in mind that moving the closing date from the end of a month to the start of the next month only changes the timing those charges, it doesn't really save you money.

Rolling the costs into the loan sound easy but you have to think about. It means that you will be paying interest on those charges for the life of the loan.

It is good that you are starting to think about all the costs.

Answer 2

According to Realtor.com, there are a variety of options to save on closing costs:

1. Look for a loyalty program. Some banks offer customers help with their closing costs, if they use the bank to finance their purchase.
2. Close at the end the month. One of the simplest ways to reduce closing costs is to schedule your closing at the end of the month.
3. Get the seller to pay. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing cost credit.
4. Wrap the closing costs into the loan. You're already borrowing probably hundreds of thousands of dollars—why not tack on a few thousand more?

A general Google search on "how to reduce closing costs" will return a lot of results on other people's experiences, as well as tips and tricks.

Answer 3

As a buyer, one of the easiest ways to save on closing costs is to avoid title insurance. This will only apply if you are a cash buyer, as a mortgage writer will typically require title insurance.

It is also one of the most ill-advised ways to save money. You need title insurance.

For the most part, there is really no way to truly save on closing costs. Wrapping costs into a loan, saving on interest or taxes through timing don't truly save money. Sometimes you can obtain discounts on closing by using an targeted lender, but that may cost you in higher interest rates.

By paying points on your loan, you may increase your costs at closing in order to save money on interest paid.

Certainly you can't discount required, government imposed fees (like doc stamps).

You may be able to shop around and find a bit lower fees for appraisal, credit reports, title company fees, and title insurance. However, that is a lot of work for not a lot of return. Title companies seem to be pretty tight lipped about their fees.

The best yield of your time is to get the other party in the transaction to pay your costs. The market or local tradition may not allow this. An additional way to lower your costs is to ask the realtors involved to discount their commissions. However, they could always say "no".

The bottom line is transacting real estate is very expensive.

Answer 4

Good answers here. I would like to add one more (less obvious) way to save - look for houses that are For Sale By Owner (FSBO). Owner's who are selling without an agent do not have to pay a seller's agent fee.

The closing cost savings here are actually on the seller's side of the transaction. However, since you know the seller is saving money, you may be able to negotiate a lower overall selling price with them (or it may be priced lower than comps already) because of this factor.

FSBO houses maybe trickier to find than those listed by an agent, because they will not appear on the national MLS used by realtors to find/advertise houses that aren't being sold by their own clients. You may need to physically walk the streets of the neighborhood you're interested in moving to, to look for FSBO yard signs. FSBO sellers may also advertise in local newspapers.

Answer 5

Do I need to pay for an inspection, or am I likely to save enough money from skipping it to cover potential problems that they would have caught?

A home inspection costs hundreds of dollars. The average is $315. Inspections regularly catch things that cost tens of thousands of dollars to fix, e.g. a new roof or a cracked foundation.

You also might find that a home inspection is required for your mortgage.

do I need a realtor, or can I do their job myself?

Unless you are a licensed realtor or you buy directly from a seller without a realtor, the fee (charged to the seller) will be the same regardless of whether you have a realtor. The seller's realtor will share the fee with your realtor if you have one. So you can do the work yourself (perhaps not as well), but you won't save money by doing so.

If you have a lot of flexibility in when you purchase, you could look for especially cheap properties with motivated sellers. Arrange financing ahead of time (before you find a house), so you can close quickly. Some sellers will give you a discounted price to finish the sale quickly. Even small savings on the price of a house will outweigh most savings on closing costs.

Answer 6

Mostly ditto Pete B's answer. There's little you can do about closing costs.

Some closing costs are government fees. There's nothing you can do about this. Sad and unfair as it is, taxes are not optional and not generally negotiable.

Title insurance and fire insurance are required by the lender. Even if you're paying cash, you don't really want to skip on these. If your house burns down and you have no insurance ... well, if you're worried about saving a few hundred on your closing costs, I assume that losing $200,000 because your house burned down and you have no insurance would be a pretty bad thing. Title insurance protects you against the possibility that the seller doesn't really legally own the property, maybe a scam, more likely a mistake or a technicality. You can, and certainly should, shop around for a better deal on insurance. Last couple of housing transactions I made, title insurance was a one-time fee of around $200. (I'm sure this depends on the cost of the house, where you live, maybe other factors.) Maybe by shopping around I could have saved $10 or $20, but I doubt there's someone out there charging $50 when everyone else is charging $200. Fire insurance you're probably paying a couple of thousand a year, more opportunity for savings.

Typically the buyer and the seller each have a realtor and they split the fee. If you go without a realtor but the seller hires one, she'll keep the entire fee. So the only way to avoid this expense is if neither of you has a realtor. I've never done that. Realtors cost a ton of money but they provide a useful service: not only helping you find a house but also knowing how to deal with all the paperwork. Plenty of people do it, though. I presume they get the title agency or the bank or somebody to help with the paperwork. There are also discount realtors out there who don't show your home, do little or nothing to market it, basically just help you with the paperwork, and then charge a very low fee.

Timing closing for a certain day of the month can reduce what you owe at closing time -- by reducing the amount of interest you pay on the first month's loan payment -- but it doesn't save you any money. You'll make it up over the course of the loan.

You might possibly save some money by timing closing around when property taxes are due. Theoretically this shouldn't matter: the theory is that they pro-rate property taxes between buyer and seller so each pays the taxes for the time when they own the house. So again, you might need less cash at closing but you'll make it up the next time property taxes are due. But the formulas the banks use on this are often goofy. Maybe if you live some place with high property taxes this is worth investigating.

You could skip the inspection. But inspections I've had done generally cost about $500. If they found something that was a major issue, they might save you from buying a house that would cost tens of thousands in repairs. Or less dramatically, you can use the inspection report for leverage with the seller to get repairs done at the seller's expense. I once had an inspector report problems with the roof and so I negotiated with the seller that they would pay for a percentage of roof repair. I suppose if you're buying a house that you know is run down and will require major work, an inspection might be superfluous. Or if you know enough about construction that you can do an inspection yourself. Otherwise, it's like not buying insurance: sure, you save a little up front, but you're taking a huge risk.

So what can you control? (a) Shop around for fire insurance. Maybe save hundreds of dollars. (b) Find a seller who's not using a realtor and then you don't use a realtor either. Save big bucks, 6 to 7% in my area, but you then have to figure out how to do all the paperwork yourself and you severely limit your buying options as most sellers DO use a realtor.

Besides that, there's not much you can do.