Paying for Closing Costs

 In First-Time Home Buyers

Saving for a down payment is hard enough, and then there are closing costs on top of that.  Here’s how to make paying for closing costs as painless as possible.

Closing costs are the costs associated with buying a house.  Many lenders charge outrageous fees to get a loan (sometimes many thousands of dollars), and then there are the fees that other service providers charge, such as an appraisal, title fees, homeowner’s insurance, property taxes, etc.

The only lender fees we charge for conventional loans, FHA loans, and VA loans are a $500 processing fee and a $44 credit report fee.  We don’t know any lender that charges less. However, there’s no way to avoid paying all the other service providers. You have to pay for homeowner’s insurance, you have to pay for property taxes, you have to pay the appraiser – the list can seem endless.

The good news is that you do have a choice when it comes to paying for closing costs.  Here are the 3 ways you can pay for them:

1) Pay the Closing Costs in Cash

You can always pay the closing costs yourself.  This is the cheapest way to do it, but it means you need to have the money.  If the closing costs total $4,000, then you need to have that $4,000 before you can close on the house.

2) Pay the Closing Costs with a No Closing Costs Loan

When you get a no closing cost mortgage, the closing costs don’t really go away.  Instead, the lender pays them for you. The way lenders do this is by charging you a higher interest rate.  When you agree to pay a higher interest rate for the life of the loan, the lender will be able to give you a lender credit, which is money that can be used to pay for the closing costs.

This is the cheapest way to go if you don’t have the cash to pay the closing costs yourself, but in the long run, it will end up being more expensive for you because you will be paying a higher interest rate for the next 30 years (or however long your loan term is).

On the flip side, if you know you are going to be moving in a few years, this is often the cheapest way for paying for closing costs.  The amount the lender gives you as a credit might be more than the amount you will pay in additional interest by paying a higher rate.  If you are sure you will be selling the house in a few years, consider this option.

3) Get the Seller to Pay the Closing Costs for You

You can always have the seller pay the closing costs for you, but you must include this in your sales contract.  Usually, if the seller agrees to pay your closing costs, they will want more for the house. Otherwise, they will be losing money.  If the closing costs are $4,000, the seller will typically ask you to pay $4,000 more for the house.

This may be a good option for you, but remember that the loan amount will be higher than it would have been if the seller didn’t pay your closing costs, and you will be paying interest on that additional amount for the entire term of the loan.

How Do You Decide Which Way is Best?

The only real way to determine the best way for paying for closing costs is to compare the total costs of the loan for all 3 options.  Luckily, we have very good software that does just that. We can put together a Total Cost Analysis for you, which shows you how much you will save each month, how much you will save over 5 years, and how much you will save over the life of the loan with each option.

Give us a call and we can show you the best option for your situation.

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