You probably already understand that you need to save when you buy an investment property – but did you know that there are other fees that pop up throughout the process? Be aware of these fees so you can save more responsibly before making this investment.
From application fees to closing cost fees, the upfront cost of buying a rental home can be between 2% – 5% of the loan principal. Here are a few ways you can avoid paying some of these service fees and keep more cash in your pocket.
10 Ways to Avoid or Reduce Service Fees
Here’s how service fees work and how to avoid negotiable fees – it could save you thousands during the closing process.
1: Find a Lender That Waives Most Fees
Did you know that some lenders charge a fee for processing your mortgage application? Many lenders also charge fees for processing online payments, shipping documents, mortgage verification and more. These small fees can really add up.
You can catch these fees upfront by looking for words like “processing fees,” “origination fees” or “underwriting fees.” Some fees are unavoidable, but you should compare the cost of these fees between lenders and shop around to find lenders who won’t charge any unnecessary fees.
2: Save on Closing Cost Fees
Closing on your investment property is exciting – but it’s important to know how much you’re slated to pay in closing cost fees. You can minimize the amount you spend by shopping around. Find out how much your lender typically charges at closing, so you won’t have to worry about additional closing costs popping up. Your lender is required by law to send you a Closing Disclosure three days before your closing date. A Closing Disclosure is a document that provides all of your final financial details, including closing costs.
In addition, work closely with your agent to determine which fees are solely your responsibility and which fees might be worth negotiating with the seller’s agent.
3: Explore Home Buying Rebates
It’s a good idea to partner with a local real estate agent, or buyer’s agent, to help you navigate your buying journey. Your buyer’s agent will help you find the right investment property, negotiate with sellers on your behalf and offer important advice along the way.
As the buyer, you shouldn’t have to pay for real estate agent costs when you buy a property (the seller usually pays those costs at closing), but you will pay for closing costs. However, your agent might provide you with a rebate at the time of closing. This rebate would be taken from the percentage agents earn from the seller and can be used to help you pay for closing costs and keep more money in your wallet.
When you hire your agent, find out if they offer buyer rebates. This is a nice perk, but remember that it’s more important to team up with a quality full-service agent who will help you navigate the entire buying process than it is to find a less-involved agent who will provide a rebate.
4: Reduce Title Company Fees
You’ll need to hire a title company to perform a title search on the property and issue title insurance. A title company ensures that the title on a property is authentic and that there are no outstanding liens or claims to it.
In other words, title insurance will protect you and the lender in the event that another person pops up and claims to own the same property.
There’s no way to eliminate the cost of this service – but you don’t have to stick with the first title company you find or the company your lender or agent recommends. Instead, shop around and compare services and costs until you find the company that best suits your needs.
5: Don’t Forget Appraisal Fees
A property appraisal will be required if you plan to finance your real estate investment. An appraisal is performed to help the lender determine the property’s actual value. This is done to protect the lender from financing a place that might be worth less than the listing price.
Your lender will typically arrange for a company they partner with to appraise the property. In some cases, you can negotiate which appraisal company will be used or negotiate the appraisal fee ahead of time.
Talk to your lender to find out how much they typically charge for appraisals, then do your own research to decide if this cost is justified. Some lenders bundle all of their fees into one package so that you see all of your mortgage-related service costs all at once. Ask them to break down the appraisal fee for you so you can get a good sense of how much this service costs.
6: Minimize Property Inspection Fees
A property inspection is also an important part of the closing process. Your inspection will ensure that your new property does not have any unexpected issues or needs expensive repairs. This cost usually falls solely on the buyer but you can shop around for different inspection companies and weigh their quotes and services before you select one.
In some cases, your real estate agent might be able to negotiate all or some of the inspection fees with the selling agent so that they’re added to the seller’s closing costs. This isn’t common, but it is possible.
7: Budget for Homeowners Association Fees
You might be required to pay homeowners association (HOA) fees, depending on the community where your new investment property is located. HOA fees are required payments owners must pay for certain properties to help maintain the upkeep and appearance of the community. You won’t be able to negotiate these fees, but it’s important to understand how much they’ll cost upfront so you can factor them into your budget.
8: Plan for Private Mortgage Insurance
Your lender will likely require that you purchase private mortgage insurance (PMI) if you put down less than 20% on the property unless you opt for a VA loan. PMI protects the lender in case you default on your loan and is a non-negotiable expense.
In most cases, your private mortgage insurance will be rolled directly into your monthly mortgage payment. In general, PMI will run you anywhere from .5% to 1% of the loan amount each year. Let’s say your mortgage is $200,000. Expect to pay up to $2,000 a year, or $166.70 per month.
You might also want to opt for a mortgage that allows you to cancel your mortgage insurance once you’ve successfully paid off 20% of your home’s value. This can save you thousands over the term of your mortgage.
9: Consider Discount Point Purchases
Many mortgage lenders allow you to purchase mortgage points during closing. This fee is paid directly to your mortgage lender and allows you to lock in a better mortgage rate, which can reduce your monthly mortgage payments.
One mortgage point costs 1% of your mortgage amount. For a $200,000 mortgage, you would need to pay $2,000 during closing to purchase a mortgage point. Some mortgage lenders even allow you to purchase half a point. Each point reduces your mortgage rate by a specific percentage, which varies by lender.
Mortgage points are generally a good investment for real estate investors who plan to keep the property for six or more years since it typically takes that amount of time to break even and start benefiting from your mortgage points.
You don’t have to purchase mortgage points – they’re completely optional and may not be worthwhile if you aren’t sure how long you plan to keep the property. You can also save money upfront by avoiding these fees.
10: Understand Which Fees Are Non-Negotiable
There are a number of fees you can avoid, reduce or negotiate during the buying process. Partner with a knowledgeable local agent to help maximize your savings.
Fees that are non-negotiable usually include:
- Title fees
- Title insurance
- Courier fees
- Tax service fees
- Recording fees
You may be able to seek assistance with these fees. Look into state, federal or private grant programs that can help low-income or eligible buyers pay for closing costs and other mortgage fees. Many states offer assistance for low- to mid-income buyers and special funding exists for public service officials, police officers, firefighters and teachers. Look into all of your grant options and talk to your agent and lender to find out more information.
Prepare And Budget for Service Fees
It’s a great idea to try to reduce fees where you can when buying an investment property, but you should prepare and budget for essential fees. You can talk to your lender about the non-negotiable fees your mortgage requires, so you can factor them into your financial plan.
Typically, buyers should expect to pay anywhere from 2% to 5% in closing costs (though this varies by state and location). Many times, thousands of these dollars can be eliminated if you find a lender who charges you only the bare minimum amount of fees for processing your property loan.
Be ready to pay for the required service fees and closing costs during the home buying process – ask some questions so you can maximize your savings during the closing process. It’s important to find a lender who won’t charge excessive or unnecessary fees. You can also save on service fees by shopping around for different home inspection and insurance providers, seeking an agent who offers a home buyer rebate and looking for funding programs designed to help you pay for closing costs.
This article has been contributed by Courtney Johnston.