How Can I Avoid Paying Closing Costs?

Lucky you. You just found the house you want, which happens to cost exactly what you can afford. Who knows for how long this opportunity will last? You don’t think much about it and proceed to close the deal.

Surprise, surprise! The price has just gone up by 5%. The house may be worth the same, but there are still necessary costs you need to cover in order to buy it.

And we’re not talking of paying ~$50 on bank transfer fees. Closing costs can cost anywhere from $2000 to over $10,000 depending on the property value. If you can’t afford that, you lose the deal.

Why didn’t they tell you about this before?

Because closing costs are complex. There’s not a single way to reduce these costs:

  • Origination fees depend on the lender you choose exclusively
  • Closing costs divide into services you can and cannot shop for
  • The seller may change the offer for the house

Unless the seller waives closing costs (unlikely), you can’t remove them completely. But you can minimize them to spend as little as possible. We’ll share how to do it in five simple steps.

How Can I Avoid Paying Closing Costs?

How Can I Avoid Paying Closing Costs

Most people look at these as something unavoidable they have to pay, especially first-time buyers. The problem is, you end up paying far more than what you have to:

  • Closing costs can add 3-6% to your loan amount. These include expenses such as title insurance, appraisals, attorney fees, and taxes
  • Let’s say you saved just enough to afford that house. If you add closing costs, you may no longer qualify for it
  • Closing costs don’t end when you sign the agreement. Every time you refinance, you might need to pay for them again

Here’s the downside of a reverse nortgage and refinancing.

When buying your dream home, the last thing you want is to spend your savings on fees. You don’t want to pay more than you have to. You need savings to cover all the unexpected expenses that arise after the purchase.

For many, this will be the biggest purchase decision of their lives. So every dollar you save counts.

Here’s how to prepare for it:

#1 Shop For Lenders

Few people know that you can get a Loan Estimate from a lender. You don’t need to apply or have a mortgage approved to receive it. That allows you to gather estimates from many lenders, comparing each other.

Here, it’s not about choosing the one that offers the best price. Remember that these are estimates. The only cost the lender knows is the one they set themselves, which is Origination Fees (Section A).

These cover administration, processing, and application fees.

Find out who offers the best quote for origination fees. The difference could be thousands of dollars. And take a loot at our guide to traudulent loans, just in case.

#2 Choose To Pay Less Up Front

When your main problem is closing the house, you can lower that entry barrier at the cost of higher interest rates. You pay less up front, but your monthly expenses increase.

Ask yourself: Is it better to pay later or pay today? If you don’t want to raise your rates, you can always wait until you save up a bit more.

Here’s the strategy:

Don’t pay any points on the purchase. Usually, this means that for every % you pay for the loan value, they lower your monthly rate. When you want to pay less up front, this is your best option.

Also, try to lower your down payment or remove it completely. You can now save more money upfront.

This way, we’ve lowered entry costs by increasing the monthly expenses. If your credit score is excellent, you qualify for better rates, so interest shouldn’t be a problem.

If you want to save even more, choose an adjustable-rate mortgage. You’ll start with a fixed rate, but after a few months, it will adjust to whatever rate is the average of the market. If you expect it to play in your favor, you may end up paying less.

#3 Shop For Services

By default, closing costs do everything for you to save time. And Default almost never equals Best Offer. They will likely overcharge you unless you do it yourself. See common mortgage scams and how you can avoid them.

In the loan estimate, you’ll find a section that discloses what costs you can and cannot control. For example, you can shop for:

  • Architectural/Engineering Fee
  • Pest Inspection
  • Survey Fee Attorney Fees
  • Title Insurance

Usually, you cannot shop for:

  • Appraisal, which values your property on the lender’s behalf
  • A credit report on you
  • The fees to assess flood risk of your property
  • Tax monitoring
  • Tax status research

Best of all, you can see what each item costs you. Start cutting off the most expensive ones.

#4 Close At The End Of The Month

The day you choose to close can make about ~$600 of difference. And it’s so easy to avoid that you cannot afford not to do it.

There is a pre-paid interest period between the closing date and the end of the month. If you close on the first day, it means you cover the interest for the other ~30 days. If you close on day 29 or 30, however, you only pay for one day or two. So you go from paying ~$600 to <$50.

Also, don’t try to rush the deal to get the right timing. If you only have three days until the end of the month and still aren’t sure about the deal, wait until the next one. Give yourself time to review every detail.

You may spend less on pre-paid interest. But if you rush, you’ll pay more on other costs you overlooked anyway.

So far, we’ve covered the easiest ways to lower your closing costs. The following four require more work and aren’t always possible. But even if they don’t apply to you, it’s still worth knowing them in case you do.

#5 Ask To Waive The Costs

You don’t lose anything in negotiating costs with your seller. In the worst case, they say no, or you get a counter-offer.

Most sellers’ default answer is No because they’re not obligated to cover those expenses. But they may accept if you offer a bigger down payment.

Sometimes, they will accept if you show you can afford them. So you agree to cover the costs of the purchase, but they refund you the full/partial amount thereafter.

You can also remove costs at the cost of a higher monthly rate. In fact, that’s how some lenders lure borrowers into no-cost mortgage loans.

Lastly, some mortgage loan types may instantly qualify for no-cost mortgages, such as FHA and VA.

But if none of these options work for you, try other strategies.

#6 Pay In Cash

It’s no secret. You pay in cash for the whole house, and you don’t need to sign up for any mortgage loans. You can skip interest rates and it has no closing cost. It’s, by far, the most efficient way to pay.

So if you believe the housing market will improve, or you’ll earn more in your career, wait for a better moment to buy.

Maybe you already have that amount saved for the house, but you hesitate whether to spend it or not. Well, money can devalue quickly when you save over six figures, so it’s smart to use those savings now.

#7 Move To A Better State

Each state has different taxes, fees, and regulations. To give you some context:

And that assumes your loan value is between $100K and $200K. If you can move, why not save those grand?

This has more to do with your personal choices. Where do you want to live? Some states are cheaper than others, even though many share the same culture or climate. If you’re going to live there for decades, your decision may save you potentially six to seven figures.

If you want to do it, avoid states like Delaware, New York, Washington, Texas, and Maryland (especially the area of District of Columbia). Instead, you could move to Indiana, Missouri, South Dakota, Iowa, or Kentucky, among others.

#8 Raise your credit score

If you get better grades at school, you might get a better career. And if you get a high credit score, you can enjoy financial comfort.

Life is a lot easier with an excellent credit score. Whenever you need money, you can borrow it. And when making big purchases, you can get exclusive discounts.

If you’re financially active AND responsible, you deserve to pay less and get more help. Although this doesn’t directly lower your closing costs, it will lower the overall cost of your house. Lenders and sellers are more open to negotiation. See how you can make an offer for a house most effectively.

We’ve covered the ins and outs in our quick credit score guide. But if you want to go straight to the facts, you can increase your score by:

  • Meeting payments on time
  • Keeping utilization rates low
  • Opening more lines of credit
  • Making few or no hard inquiries every year
  • Building your credit score early (credit history length)

If you can’t meet a payment that may put your score at risk, consider borrowing or refinancing. And if you make a financial mistake, it will disappear from your credit report after 5-10 years.

The Bottom Line

Big purchase decisions involve big responsibility. Yes, you can cut closing costs here and there. But when it comes to important purchases, it all depends on the financial decisions you make in the long-term:

  • How well you manage payments and debt
  • How careful you are with your credit score
  • How early you pay back your loans
  • How you spend the money you make
  • How much income you generate

All of them will determine your financial situation. If you develop the right habits, you can eventually achieve financial freedom.

The freedom to buy the dream house you want, for example.

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