Closing Costs: Bummer or Benefit?

Closing costs are easily forgotten in the thrill of house-hunting. When shopping for a home, buyers tend to focus on the purchase price and down payment, skipping over the fact that they will need to produce another sizeable sum of money before snagging the keys. Bummer, right? Well, that all depends on your approach. For house shoppers with an open mind and a few extra dollars, they might be able to turn that bummer into their own benefit.

Let’s Start with the Basics: What Are Closing Costs?

Closing costs are the compilation of fees owed upon the closing of a mortgage to finalize the deal. These fees range anywhere from 2-6% of the sale price and include expenses like property taxes, title, appraisal, insurance, realtor commissions, and escrow considerations. With the average sale price of houses in the U.S. nearing $500,000, that can put closing costs anywhere from $10,000 to $30,000 dollars for the average American homebuyer.

Thankfully, most realtors can give you an estimate on closing costs based on your area and budget early in the process. Then, as the closing date nears, the lender will provide a closing disclosure, outlining the final amount and break down of fees. This disclosure must be given within at least 3 days of the closing date, so borrowers can prepare for the delivery of funds via wire transfer, certified check, or cashier’s check, depending on the lender’s preference.

Do Closing Costs Apply to Every Loan?

While some lenders may boast “no-closing-cost mortgages,” this is not entirely accurate. All mortgages and refinance options require at least some closing costs. These no-closing-cost options actually roll the fees into the loan itself, requiring borrowers to pay back those monies with interest over the life of the mortgage. So, while the fees are not required upon the date of closing, those costs are still paid and end up being significantly more expensive when all is said and done.

Which Closing Costs Can Be Avoided?

With a little work, some closing costs can be avoided. Not every lender charges application or origination fees, and for first-time-homebuyers, there are an array of incentives that can help skirt some of the costs. Title insurance is typically required by the lender (and for peace of mind), but price shopping is possible.

Other fees like home inspections are sometimes optional, but we would strongly caution against foregoing this relatively inexpensive inspection that can save you thousands down the road. And while homeowner’s insurance is not always universally required, wise homeowners do not bypass this cost either. Additional expenses like realtor commissions are also unavoidable in most cases but can sometimes be negotiated down or placed on the seller.

While most closing costs cannot be evaded, buyers can tackle them a few different ways:

1. Just pay up. Sometimes these things are simply part of doing business.
2. Ask if you can fold the closing costs into the mortgage. As previously mentioned, this option will result in paying a higher amount due to interest, but for those already stretching to reach the down payment, it can be a reasonable route to homeownership.
3. Use closing costs as a means of negotiation. This can help buyers avoid at least a few of these last-minute expenses; however, this is notably easier to accomplish in a buyer’s market where available housing outnumbers potential buyers.

How Can I Use Closing Costs for My Benefit?

For homebuyers with a little extra cash in their pockets, offering to cover the lion’s share of the closing costs may help secure a deal that might otherwise go to the next person in line. Just like the buyer, many sellers are hoping to avoid those final fees, too. Taking on some (or all) of the closing costs may help negotiate the overall sale price or boost your offer above the competition.

The success of this tactic greatly depends on the situation. Sellers looking to purchase a new home for themselves may already be stretched to hit their own down payment when much of their own funds are tied up in the equity of their current property. In these scenarios, offering to cover the closing costs may work to your advantage, speeding up negotiations and hopefully decreasing the final sale price.

Upon first glance, closing costs can feel like a bummer, but for a buyer with financial flexibility, using these somewhat unavoidable costs as a bargaining chip can end up being a bigger benefit in the long run.