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February 18, 2020

Shifting the burden of closing costs when purchasing a home

Every home mortgage loan requires closing costs. These costs are separate from the money that will go to the seller at closing.
First, there are lender fees such as processing and underwriting fees. Then there are non-lender fees, which include title insurance premiums, appraisal fees, inspection fees, and perhaps attorney fees. They all add up, and they do have to be paid, one way or another.
You know that it’s wise to become pre-approved for a mortgage loan before beginning your search for an Orlando home. It is also wise to discuss your alternatives with regard to the down payment and closing costs.
Depending upon the market, the seller may be willing to pay some or all of your closing costs. In a buyer’s market, a seller might readily agree. However, in a tight seller’s market, you might have to increase the purchase price to offset this seller concession.
Since closing costs generally come in at between 1% and 2% of the selling price, the house should still appraise for enough to cover the price increase.
Another way to reduce the amount needed out-of-pocket at closing is to pay a slightly higher interest rate in exchange for a lender credit for closing costs.
Here’s how the alternatives will affect your monthly payment on a $300,000 30-year fixed-rate mortgage, assuming that your lender has offered you a 4.25% interest rate:
Option 1:
You pay your own closing costs on a $300,000 loan at 4.25%. Your monthly payment for principal and interest will be $1,476.
Option 2:
Your lender increases the interest rate to 4.5% and gives you a 1% credit ($3,000) for closing costs. Your monthly payment for principal and interest will be $1,520.
Option 3:
The seller agrees to pay 1% of the loan amount ($3,000) to assist with your closing costs. Your interest rate remains at 4.25% with a monthly payment of $1,476.
Option 4:
You increase the purchase price by 1% ($3,000) and the seller pays $3,000 in closing costs. Your loan is now $303,000 with an interest rate of 4.25%, and your monthly payment will be $1,491.
Your true closing costs will be more or less than the 1% used in this example, and a seller may be willing to pay some but not all of your closing costs without raising the purchase price.
Once you’ve shopped for an Orlando home and know the approximate price you’ll pay, go over these details once more with your lender and your agent. Understanding your alternatives will aid both in writing your home purchase offer and in negotiating with the seller.

Cathy Starkweather