One of the easiest ways to reduce your closing costs is to get a no cost mortgage. With a no cost mortgage the borrower pays no non-recurring closing costs but pays a higher mortgage rate, which typically ends up costing the borrower more in increased interest expense in the long run. There are several points to consider if you are thinking about getting a no-cost mortgage.
Understand How No Cost Mortgages Work
First, make sure that the mortgage is truly no cost and ask the lender upfront what non-recurring costs you are required to pay, if any. Make sure that you are not required to pay any lender or third party costs including the appraisal, title and escrow fees. Additionally, make sure that no costs are rolled into your mortgage. Rolling closing costs into the loan amount is a clever way for lenders to make borrowers pay closing costs without charging the borrower upfront. You want to make sure that your loan amount does not increase over the course of the mortgage process.
Second, the interest rate for a no cost mortgage is approximately 0.25% - 0.5% higher than a loan with typical closing costs. A no cost mortgage may be right for you but be sure to understand the trade-off between not paying closing costs upfront and paying a higher interest rate for the life of your loan. A higher mortgage rate means your monthly payment is higher which can add up to a lot of money in the long run.
If a property owner is motivated to sell, they may pay for part or all of your closing costs. Requesting that a seller pay for closing costs is part of the property purchase negotiation. For example, if a home is listed for $150,000, you could make an offer for $150,000 and request that the seller pays $3,000 in closing costs. From the seller's standpoint, this is basically the same as making a $147,000 offer. Offering the full list price and requesting that the seller pay for part or all of your closing costs -- $3,000 in this example -- is a creative way for a home buyer to finance the costs because they are essentially added to your loan amount.
In a hot real estate market the seller may be unwilling to consider paying for closing costs but it never hurts to ask. If the seller does agree to pay for closing costs, this is included in the offer to purchase and factored into the transfer of funds between the buyer and seller managed by the closing agent.
This seems like a simple point but many borrowers fail to compare mortgage proposals from multiple lenders. We recommend that you compare mortgage quotes from at least five lenders to find the best low terms including the lowest mortgage rate and closing costs. Comparing lenders also puts you in a better position to negotiate lower closing costs. For example, if you find a lender that offers a low mortgage rate but higher closing costs see if that lender is willing to match the lower closing costs offered in a different proposal. The more lenders you compare, the more options and bargaining power you have. The table below shows closing costs and mortgage rates for leading lenders in your area. Contact multiple lenders to compare loan terms.
When you compare mortgage quotes request a lender fees worksheet and loan estimate from the lenders. These documents, provided free of charge, outline key mortgage terms including lenders fees and closing costs. You can use this detailed information to negotiate lower closing costs or discounts for specific fees. You should compare lender fees such as origination and administration fees as well as costs for third party services such as the appraisal report, title insurance and escrow or attorney services. You may find differences in the cost for these items, especially for third party services such as the appraisal report, and you can use this information to negotiate lower closing costs.
For example, if one lender is offering a lower interest rate but charging $300 more for an origination fee, negotiate with the lender to match the lower cost for the fee. Lenders are competing for your mortgage business so use this competitive dynamic to play lenders off each other and lower your closing costs.
Most people are familiar with the concept of a rebate when it comes to buying a car but rebates also apply to getting a mortgage, although it works a little differently. Most lenders quote you a range of mortgage rates and there is a cost or rebate associated with each level. Borrowers may be required to pay a cost for a lower mortgage rate but receive a rebate from the lender if they are willing to pay a higher rate. For example, the borrower may be required to pay a fee with a 4.000% mortgage rate but received a $2,000 rebate if they pay a 4.500% rebate. The borrower can use this rebate to offset their closing costs.
Use our Mortgage Comparison Calculator to compare loans with different costs and rates
The amount of the rebate depends on the mortgage rate, loan amount and other factors. A lender paid rebate works similar to a no-cost mortgage because in the long run paying a higher interest rate can cost you more that the rebate you receive over the course of your mortgage. For example, you may receive a $2,000 rebate but paying the higher mortgage rate may cost you $3,000 more in total interest expense, so there is a trade-off. For borrowers who are struggling to pay for closing costs and who can afford a moderately higher monthly payment, a rebate may be a good option.
Local and state housing agencies, departments and commissions offer grants that help home buyers pay for part or all of their closing costs. These programs are usually targeted at low-to-moderate income borrowers and are usually structured as a grant that you do not need to repay as long as you own and live in your home. Applying for a closing cost assistance grant requires extra time and effort by home buyers plus program availability and funds may be restricted.
We encourage you to contact a HUD-approved housing department to understand grant eligibility and program requirements. For eligible borrowers, a closing cost assistance grant can make buying a home much more achievable.
Some lenders also offer their own closing cost assistance programs. Lender programs are similar to grants provided by housing agencies or departments although there are a couple of important differences. The grant must a be gift that the applicant is not required to repay. Also, the money from the lender can only be used to pay for closing costs and not other items such as your down payment. There grant is also capped at the total amount of your closing costs although the lender may offer a lower amount. Because these programs are relatively new, not many lenders offer them but it never hurts to ask -- every little bit helps when it comes to paying for mortgage closing costs.
Mortgage Closing Costs: http://myhome.freddiemac.com/buy/determine-costs.html
Closing Cost Programs: https://www.hud.gov/buying/localbuying