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Minimizing Closing Costs in Real Estate Purchases Print E-mail

When purchasing real estate, your major outlays of cash involve the down payment and the closing costs. During the last several years, down payments have become less to the point, when you can purchase with no or little down payment. Closing costs cannot be totally alleviated, but with a little knowledge about the escrow process, you can substantially minimize your closing costs.

Basically, closing costs are the payments due at the close of escrow, which is the point when title to the property changes from the seller to the buyer. While there are certain customs associated with whether the buyer or seller pays various closing costs, ultimately who bears the cost can be the subject of negotiations.

Closing costs fall under two headings: statutory (fixed) costs and variable costs. The statutory costs are dictated by law and are generally fixed in the amount payable. Variable costs are more negotiable, and as such, can help reduce your closing costs.

Statutory or Fixed costs include:

Recording fees - These are fees charged by various counties for the recording of the Deed of Trust and any other pertinent documents. Each document recorded requires a fee.

Transfer fees - These are fees charged by counties that usually amount to a percentage of the sale price. Each state and county has different rates. Check with your county recorder to determine the transfer fees.

Pro-rated Taxes - These include taxes paid on the real estate, such as property and school taxes. The figure is pro-rated. Example: if the property is sold six months into the tax year, the buyer would be responsible for half of the annual tax.

Variable costs can include:

Title Fees - These include title search and title insurance, which insures that you acquire the property free of defects in title. These fees could also include document fees, such as notary fees.

Attorney Fees - If you hire an attorney to oversee the sale process, the fee sometimes is payable at closing.

Broker Fees - These include fees paid to real estate brokers and agents. This is typically computed as a percentage of the sales price, such as 5% or 6% of the sale price. The seller usually pays these fees.

Lender Fees - These include everything from application fees, credit reports, appraisal, document fees and points. The buyer usually pays these fees because they are securing the financing.

Variable costs offer you the best way to minimize your closing costs. The ways you can reduce your closing costs include:

Whether you are selling or buying, try to get the other party to pay more of the closing costs. This obviously depends on the real estate market—whether it's geared towards sellers or buyers.

Buyers can possibly negotiate or dispense with attorney fees, and sellers can sometimes reduce real estate broker fees by negotiating a lower percent with the broker/agent, or selling the real estate themselves or through companies such as Help-U-Sell, www.helpusell.com.

As a buyer, you can negotiate with your lender to lessen your closing expenses by either taking a higher interest rate or financing part of the closing costs. If they want your business, they are often willing to negotiate on the terms.

As a consumer, you must ask the right questions. The idea is to be informed and know your rights. Under the terms of the Real Estate Settlement Procedures Act (RESPA), you are entitled to a "good faith estimate of settlement costs" three days after applying for your mortgage.

At the close of escrow, you should receive and sign the HUD-1 Settlement Statement. This document details all of your closing costs. If these costs do not match your good faith estimate, then question it. For more information on your rights, visit the http://www.hud.gov Web site.

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