Do you need to reduce your closing costs?

If you’ve been saving for the down payment for a home here in the Chattanooga area and have finally gotten there, only to learn that now you must save for the closing costs, there is a solution.

Every mortgage loan comes with closing costs. There are lender fees for origination, document preparation, and underwriting. In addition, there are non-lender fees such as title insurance, appraisals, attorney or closer fees, and inspections.

These can add a few thousand dollars to the funds needed to close your Chattanooga area home purchase.

How can you reduce that amount?

One common method is to simply ask the seller to pay them – or to pay up to the allowed percentage. VA loans, for instance, allow the seller to pay up to 4% of the purchase price in buyer closing costs. Other loan programs have different regulations, so this is something to discuss with your lender.

The second method – should the seller be unwilling – is to add the cost of the fees to the agreed purchase price with the understanding that the additional funds will be paid toward your closing costs. Again, you first need to know the regulations, so talk this over with your lender in advance.

Your agent must know how to explain this process to the seller’s agent and/or to the seller in the presence of his or her agent. Since this increases your loan amount, your monthly payments will be slightly higher, but only slightly. At 4% interest, a $2,000 increase in the purchase price would increase your payment by a little less than $10 per month.

Third, you can ask the lender for a credit toward your closing costs in exchange for paying a slightly higher interest rate.

Again, this is something to discuss with your lender. Ask him or her to show you your options with regard to closing cost, the corresponding interest rate, and your monthly mortgage payment. Just as you can pay “points” to lower your interest rate, you can receive a lender credit by raising your interest rate.

One point is equal to one percent of your loan amount, so if your loan will be $200,000 one point will equal $2,000. By raising your interest rate by 1/8 to ¼% you could receive a one-point credit, or $2,000 toward your closing costs.

Before making a decision, do the math. Your lender should be willing to help you determine how each different scenario will affect you both now and over the long term.

If you’re ready to talk with a lender, I’ll be glad to refer you to loan officers here in the Chattanooga area who have helped my clients in the past. And, when you’re ready, I’ll be glad to help you find the Chattanooga area home that fits both your budget and your lifestyle.