When it comes to purchasing a home, there are a variety of costs that are associated buying a home beyond just the purchase price. There are fees for attorneys, appraisal costs, home inspections, title insurance, any taxes that may be due, and the fees associated with the application and underwriting of your loan.
Most of these costs must be paid by the borrower at the closing table, which is when the ownership of the house is transferred. However, there are ways to reduce your out of pocket costs at the time of purchase. One such option is providing a lender credit to cover closing costs.
Paying Closing Costs
As part of their offer, many buyers request that the seller pay a portion of the closing costs, but this could be challenging in the tight real estate market that we are experiencing right now. Additionally, you may find that your lender limits the percentage of closing costs that the seller can pay.
Another option is that your lender can offer you a lender credit, essentially rolling it into your loan. However, that may mean you incur a higher interest rate or have additional charges as part of your mortgage. To determine if that is feasible for you, then you need to work with your lender to determine the costs and how much you will have to cover. Some borrowers choose to make a smaller down payment to be able to cover the closing costs out of pocket.
If you are using an FHA loan program, then your closing costs will be capped at 6% of your mortgage. Other loan programs limit the amount of closing costs you can add to the mortgage. Be sure to find out from your lender what is allowed with your loan and what would be considered an out-of-pocket expense.
What Are Your Options?
Clearly, rolling your closing costs into your mortgage can mean higher payments over the life of your loan, usually because of the higher interest rate associated with this option. Still, the amount of the closing costs might mean depleting your savings, which would put you at financial risk.
One option to address closing costs is to shop around. Check out various lenders and see if you can find a cheaper loan, not just in interest rate but also closing costs, or ask if there are ways to reduce the closing costs.
Depending on your lender, you may have several options to address the closing costs, including rolling some of the costs into your loan and paying the rest out of pocket. At Elevation Mortgage, our focus is helping you find the right financing option to fit your needs, including helping you understand your options for paying closing costs. Contact us to learn more!