Paying closing costs is one of the last stages of buying an investment property. Closing costs are usually between 3% and 6% of the property’s purchase price. This means that for a $300,000 investment property, you will have to pay between $9,000 and $18,000 in closing costs.
Closing costs include a wide range of fees for services required to finalize a mortgage. Here are some of the fees that real estate investors should look out for:
- Appraisal fee – Lenders will want to know if the investment property’s value is equal to the amount you want to borrow. This will assure them that they can recoup their money in case you default on your mortgage payments.
- Home inspection – Home inspection is another requirement for most lenders. If the inspection reveals significant problems, the lender might withhold the loan until the issues are fixed.
- Application fee – This covers costs incurred in processing your new loan application such as administrative expenses and credit checks.
- Attorney’s fees – In some jurisdictions, an attorney must be present at the closing of the real estate transaction. The more hours the attorney works for you, the more you will pay.
- Loan origination fee – This is also referred to as the processing fee, administrative fee, or underwriting fee. The lender charges the loan origination fee for assessing and preparing your
- Mortgage broker fee – If you use the services of a mortgage broker to find a loan, you will be charged a commission which is a percentage of the total loan amount.
- Upfront mortgage insurance – Some banks might require an upfront payment of the first year’s mortgage insurance premium.
- Property taxes – Usually, property buyers pay about two months’ of county or city property taxes at closing.
- Title search fee – A title search ensures that there are no outstanding liens or claims against a property. These fees vary from one title company to another.
You can use Mashvisor’s rental property calculator to get an idea of the closing costs you are likely to incur. This tool will provide estimates for the total sum of closing costs for any investment property for sale in the US housing market. Get your closing cost estimates now by signing up for Mashvisor.
The coronavirus pandemic has had an adverse effect on the US housing market. Many people have lost their jobs and businesses have been shut down. As a real estate investor, learning how to reduce closing costs will help you save money in these adverse times.
How to Reduce Closing Costs
Here is how to reduce closing costs when buying a real estate investment:
Evaluate the loan estimate
A few days after you have applied for a mortgage, your lender will give you a ‘Loan Estimate’ form. This is a document that shows what you are likely to pay for closing costs. When you get this document, don’t just glance at it and put it away. You need to go through each fee with the mortgage lender, finding out what it covers and why it is priced that way. This is one of the best ways of spotting unnecessary or padded fees. Also, look out for fees that have similar names. The lender might be charging you twice for the same service. For example, you might find underwriting fees and processing fees listed as separate expenses.
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Look for the bank or financial institution that offers the lowest closing costs. Get quotes from as many lenders as possible. Check the Loan Estimate form for services that you are allowed to shop for elsewhere. This could include:
- Pest inspection
- Title insurance binder
- Title search
- Lender’s title policy
If you find an inexpensive option, you can reduce mortgage closing costs significantly.
You can reduce closing costs for a mortgage by negotiating the fees with the lender. For example, you could request the lender to remove some obscure fees from the closing costs. After the negotiations, request a Closing Disclosure form from the lender. This is a document that shows your final closing costs. Compare this with the Loan Estimate and make sure any discrepancies are addressed.
Avoid prepaid daily interest charges
Most mortgage lenders will require you to prepay the daily cost of interest on your mortgage between the time you sign the loan papers and the day you make your first payment. The best way to lower your prepaid interest expenses is by putting off your closing date until the end of the month. Plan ahead and schedule a closing date which will help minimize these charges.
Ask the seller to chip in
Another strategy for how to reduce closing costs is to ask the seller to pay part or all of the costs. Some sellers might be willing to do this in order to sweeten the deal. Others might be open to lowering the purchase price of the income property as a seller concession to help offset the closing costs. Depending on the seller’s motivation level and the real estate market conditions, you could reduce closing costs with the seller significantly.
Accept a higher rate to earn lender credits
When thinking of how to reduce closing costs, you should also consider taking lender credits. These credits represent a tradeoff between the ongoing expense of the interest versus the upfront cost of a mortgage. The borrower can opt for a higher interest rate so as to get a specific amount of credit which will cover the closing costs. The downside of this strategy is that you will end up paying more interest in the lifetime of the loan.
Though closing costs are an inevitable part of real estate investing, you can always find a way to minimize them. Learning how to reduce closing costs can save you hundreds or even thousands of dollars. If you don’t know how to negotiate closing costs, you could hire an experienced real estate agent to help you out.
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