Many borrowers love a zero-closing cost option, especially when doing a mortgage refinance such as an FHA Streamline Refinance or VA Streamline Refinance. However, going zero-cost is just an option. You may prefer to pay your closing costs up-front in exchange for that lower mortgage rate; and closing costs are certainly a part of every loan made. If you plan to pay closing costs, then you won’t want to overpay. There’s no need to pay more closing costs than necessary, especially given the fact that you’re already putting down a huge down payment (typically up to 20% or tens of thousands of dollars). Take a look at the below four tips and tricks to help minimize your closing costs on your next home purchase.
- Picking the Proper Loan Type for your Needs
Today’s home buyers have access to a bevy of mortgage products. Buyers can choose from between conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, and more. Each loan type meets a specific borrower need. For example, FHA loans are typically best for buyers with less-than-stellar credit and minimal funds for a down payment. VA loans, by comparison, are best for homeowners with military experience who wish to put little or nothing down. Conventional loans are the default choice for buyers with twenty percent down, and USDA loans can be terrific in sparsely-populated parts of the country. Each loan, though, comes with its own set of closing costs. Select the wrong loan type for your needs and you may pay more than is necessary. For example, a FHA loan requires 1.75% of the loan size to be paid at closing, or $1,750 per $100,000 borrowed. For borrowers with 3% to put down, the HomeReady mortgage may be a better option. The same is true for the VA home loan. VA loans allow for 100% financing, but typically require a two percent “funding fee” to be paid at the time of closing. That 2% cost must be weighed against the cost of not using a VA loan. USDA loans carry upfront closing costs, too. Therefore, when choosing your loan type, consider more than just the mortgage rate — consider the loan’s upfront costs as well. Finally, there are always new products coming – for example, HomeJab has an excellent 1% down conventional product geared toward those with good credit scores and looking to purchase a home, further saving closing costs.
- Pay less for Discount Points
Discount points are a one-time, upfront fee paid at closing which gets a homeowner access to lower mortgage rates than the market rates. They’re paid as a percentage of your loan size such that 1 discount point carries a cost equal to 1% of your loan size. A $200,000 loan with 1 discount point, therefore, would require $2,000 in “points” to be paid at closing. For homeowners who plan to keep their mortgage for 7 years or more, paying discount points can be a sensible way to pay a little bit upfront in exchange for longer-term mortgage savings. For everyone else, points may be wasted cash. That said, discount points have a secondary effect — they lower your loan’s APR. Because of this, lenders will often use discount points as a way to make their rate quotes look more attractive in the marketplace. Lenders know that consumers shop by APR even though they shouldn’t. One way to reduce your closing costs, then, is to pay the proper number of points for your particular situation, which may actually be zero. Discount points can be tax-deductible, but they can’t be refunded once paid. It is up to you, the consumer, to carefully calculate how long you plan to stay in the house and if it makes sense to pay an upfront cost or to forgo that – time value of money is important.
- Selecting a Realistic Rate Lock for your Financing
Another way to reduce your loan closing costs is to lock your mortgage rate for the appropriate time frame. Rate locks are typically available in 15-day increments up to 60 days, and then in 15- or 30-day increments thereafter. Mortgage lenders charge more for longer rate locks. For example, a 30-day mortgage rate lock is less expensive than a 60-day rate lock, and a 60-day rate lock is less expensive than a 90-day rate lock. The additional costs of a longer-term lock are paid as either cash as closing, or in the form of higher mortgage rates. An extra 30 days on your rate lock may add 25 basis points (0.25%) to your mortgage rate. However, buyer beware: lenders also charge fees for extending a rate lock. Not having the loan funded during its current lock-in window will require an extension and rate lock extensions carry high costs. It’s more expensive to extend a 30-day rate lock by fifteen day, for example, than it is to select a 45-day rate lock at the start. Keep your closing costs low by selecting a realistic and appropriate rate lock for your loan based on your closing timeframes and moving dates.
- Go For Low- Or Zero-Closing Cost When Possible
Mortgage borrowers will typically have the option of doing a low-cost or zero-closing cost mortgage. With a low-cost or zero-closing cost mortgage, closing costs are paid by the lender on behalf of the borrower. In exchange for paying the fees, the lender will raise the mortgage interest rate for the borrower’s loan. In general, the more costs that the lender covers for the borrower, the higher the increase to the mortgage interest rate. Low- and zero-closing cost mortgages are appropriate in a number of situations including scenarios in which the borrower plans to move or refinance within the next 36 months or so. Another scenario that makes sense is when the borrower expects that mortgage rates may drop in the future. Low- and zero-closing cost mortgages are a good way to maximize savings with your mortgage rate while the market gradually improves.