Buying a home can be a good financial move, but it is costly. And if you don’t make the right decisions before closing you could be costing yourself thousands. If you are in the process of buying a house or another piece of real estate, you may be required to pay some closing costs to your lender. These closing costs can add up quickly and amount to thousands of dollars, and often go overlooked until it’s time to sign the papers. Closing costs are a necessary part of the real estate buying process, but if you plan accordingly you can minimize the bite they take out of your bank account.
Roll Them Into the Loan
In some cases, closing costs can be rolled into the balance of the mortgage loan. If you are taking out a loan on a piece of property that has some equity left over, the mortgage lender may allow you to roll the closing costs into the balance of the loan. By doing this, you will essentially be paying your closing costs over the full life of the loan. This is not necessarily the best way to pay closing costs because when you take the few thousand dollars and add it to the loan, you’re paying interest on this amount over the course of many years which means you end up paying much more in closing costs in the end.
Hopefully before deciding to buy a home you started saving money in a high-yield savings account for the down payment. Having a down payment is important in today’s lending environment, and it’s just a good idea to get some instant equity and avoid PMI if possible. While you may have been saving for the down payment, you may not have considered the thousands of dollars that typically come in the way of closing costs. So, when you have your target down payment number decided upon, play it safe and tack on an additional $3,000-$5,000 for closing costs. You may still be able to negotiate out of some of the costs, but having that extra money on hand to cover it is a nice safety net. If you have money left over that’s just a bonus and you can apply it to the down payment or put it into a home maintenance fund, which you will undoubtedly need.
0% Interest Credit Card
One strategy you might be able to employ is the use of a zero-percent credit card offer. By paying closing costs with a credit card that may not charge interest for 12 or 18 months, you can spread the repayment out instead of coming up with all the money up front. In addition, if it’s a cash back or rewards credit card you may even be able to benefit from that as well. As always, you must exercise caution when using credit cards. Be sure you know the exact terms and set up a payment plan to have the balance paid off before the interest starts kicking in. If you fall behind you will end up being stuck with paying high interest on the remaining balance.
Negotiate the Closing Costs With the Seller
One of the most common ways to manage closing costs is to negotiate with the seller. If the seller of the property wants to sell his property badly enough, he may be willing to pay some or all of your closing costs for you. When negotiating this deal, you need to make sure that the right closing costs are included. The seller often splits the closing costs associated with transferring the property ownership. However, you’ll likely need help with the closing costs on the mortgage as well. Using closing costs when making an offer is a powerful negotiation tool and your real estate agent will help guide you.
If you have to pay for the closing costs out of pocket, make sure that you take full advantage of the tax benefits that they can provide. If you pay any points as part of your closing costs or prepaid interest, you can typically deduct those costs from your taxable income when you file your taxes. As always, keep good records and double check all of the loan documentation to be sure you’re only paying your fair share.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
If you choose to roll your closing costs into the loan, it works far better if you stay in the house a long time, as opposed to selling or refinancing in a few years - as most people will do.
Look at the interest amortization schedule to understand why. Most of the interest is front loaded. If you sell after just a few years, most of your payment will go to retiring the interest. If you sell after five years, you have effectively raised your closing costs by more than 50%.