Saving Money on Real Estate Closing Costs

One would think in this current real estate market that financing a house (or refinancing your current mortgage) is a bargain these days, right?  After all, this is a buyer’s market with relatively low-cost interest rates.

However, that “bargain” quickly evaporates if you are saddled with high closing costs and other fees.  These fees can add up into the thousands of dollars.

As all potential homebuyers and refinancers know, it's very difficult to compare one bank's offer against another bank because the lending fees are so varied.  As well, they are almost never guaranteed.  Lenders often add (or inflate) fees late into the transaction.  Buyers often show up at the closing and go through “sticker shock” when they find out the closing fees and associated costs are much more than they were originally told.

You can avoid this scenario by following a few simple tips:

1)     Know what costs are associated with borrowing money.

There are many types of fees that can show up on your final closing statement.  These include an application fee, credit report fee, appraisal fee, document preparation, processing fee, recording fee, underwriting fee and title insurance.

These costs can vary widely from one lender to another.  Use the internet and telephone to check around your area for the average cost of these items.  A little detective work here can save you a lot of money at the closing.

2) Have an amiable relationship with your current lender.

If you want to refinance your current mortgage, you should give your current lender the first shot at the new business.  Your current bank or mortgage company already has all the information on you and your house in his or her files.  They already “know” you and your payment history, so streamlining the application process is a distinct possibility.  In turn, this can save you a lot of redundant paperwork and money, in the form of applications fees, appraisal fees and many other associated costs.

Additionally, although fees for things like title searches and title insurance are not set by the bank or mortgage company, you can still get a break on those items.  For example, if you recently took out a mortgage or refinanced one, you can save up to 50 percent on the title insurance by asking for a reissue rate; your bank can request on your behalf.

3)     Get it in writing and negotiate from there.

Banks and mortgage companies are required to give you a good-faith estimate of your closing costs in advance.  Even though this is not a guarantee of the final costs, the written estimate will give you an idea of what kind of fees you can expect - as well as the chance to negotiate for a better deal.

4)     Be creative if you’re short on cash.

If you're low on cash on hand, consider rolling the closing costs into your loan.  Many banks and mortgage companies offer this option.  But it is imperative that you figure out how much more you'll pay each month – in principal and interest - over the life of the loan.

For example, if you roll $2,000 in finance costs into a loan with a 5.5% interest rate, you will pay approximately $11 extra per month in principal and approximately $2,000 extra in total interest.  This may or may not be worth it, depending on your circumstances and how much you are saving in total over the life of the mortgage.

5)     But don’t lose sight of the bigger picture.

Closing costs and associated fees are a consideration for both new mortgages and refinancing. The whole point of this article is to save you money in these areas.

But it is also important not to lose sight that your main goal is getting the lowest rate possible.

For example, if the difference between paying 6 percent and 5.5 percent on a new loan adds up to $21,500 in total interest on a $200,000 30-year loan, then several hundred extra dollars in closing costs is an excellent investment.  Even if you could have saved four or five hundred dollars by going with a lender with lower closing costs, the long-term savings in interest makes this a worthy investment.  In short, although saving money on closing costs should be a goal, it should not be THE goal.

Contact Keith MacLean "The PEI Re/Max Guy" for professional real estate advice