A SECRET way to pay less for your new home? Expert reveals how to reduce your out of pocket costs on closing day

Once upon a time I represented a young lady who was living in a studio apartment she HATED, and was really longing to buy her very first home. Now that she's in her late 20s, it's the wise thing to do to stop renting and begin building equity as a homeowner. She speaks with a lender, gets some generic answers about what buying a home might cost, and we're off!

We go out together, find a home, write an offer, and secure what was to become her first home. But as we progress through the transaction, she finds she's not as financially secure for this home purchase as she originally thought, and it looks like she won't quite have enough money required to close on the home. But luckily we discovered a SECRET tactic to make her home purchase come together and make her a happy homeowner after all. Curious how we were able to make this happen?   Keep reading.

In 2020, Americans are projected to buy 5.46 million homes (according to statista.com). If we aren’t at least thinking of buying a home this year, we likely know someone who is, and this info is definitely going to be useful!

And by the way: Who doesn’t love DREAMING of a new home? It’s the American “Dream” for a reason. Where we live determines so much of the trajectory of our lives…it impacts who our friends are, our degree of personal safety, our children's’ playmates, and even their quality of education.

And although most of us get a rush of excitement when thinking of packing up and moving to a new and better home in a better locale, at the same time we may feel drained and overwhelmed at the thought. All the logistics, all the days off work, all the things we have to let slide in our personal and professional life while we research and seek out a great home and figure out the financials of buying…it can be overwhelming.  

I firmly believe that most things in the real world that are confusing are made to be confusing intentionally – by people or companies seeking gain. Will you be taken advantage of or will you educate yourself and keep your hard earned money in YOUR pocket? What we're about to explore will keep your money in YOUR hands.

One of the most confusing parts of buying any new home is understanding all the fees (including hidden fees), so that you can minimize them. Let’s take a look at them now.

There are two phrases you’ll hear a lot when buying a home, and it’s very important to understand the difference.  

A “Down Payment” is the amount of money you will bring to the title company the day you close on your home that counts as an initial principal payment on your loan. It’s your “skin in the game”. It’s your equity in the deal.   

For our purpose, the term "Closing Costs" refers the sum of all other fees you pay the day of your closing that are not your down payment. Did you know: The amount you spend on closing costs can sometimes be MORE than the amount you spend on your down payment!? So it’s important to understand everything that's included in your closing costs. Here’s a list of the 5 Fee Categories:

1)     Title Company Fees – The title company will charge a fee to handle your file on closing day, and to insure your property’s title from any liens or ownership interests that might unknowingly arise in the future.

2)     Real Estate Broker Fees – when buying a home, these fees are usually minimal because the seller is likely paying for your any real estate commissions.

3)     Lender Fees – These are the biggie, and the ones we’ll focus on in this article. The commission your lender makes (called a loan origination fee) and an appraisal fee are common fees you’ll see in this category. Also, the lender may charge a fee to lower your interest rate (called “buying down your rate”). Among other things, you’ll also have pre-paid interest (discussed at the end of this article!)

4)     Government Fees – These are fees the government charges to record or process the transfer of ownership of the property. They also may collect money up front to pre-pay for real estate taxes.

5)     Hazard Insurance – You may need to pre-pay for your property’s insurance.

Obviously by changing lenders, real estate brokers, title companies, or insurance agents, you might raise or lower your closing costs. But what if you already have a dream team in place and love the people you’re working with? Can you still take measures to minimize these fees? 

What if I told you there was secret way to reduce your closing costs and the money you brought to the table on closing day, would you want to know about it? 

Earlier in this article we mentioned pre-paid interest as a fee you pay that contributes to your over all closing cost amount. After you buy the home, your mortgage payments are paid in arrears, meaning you can live in your new home THIS MONTH but you won’t receive the mortgage bill for living there until NEXT MONTH (e.g., if you live in the home all January long, you wouldn’t have to pay for that luxury until February 1st.) For ease of accounting, however, the lender allows you to close whichever day of the month you want, and rather than sending you a partial bill the following month, he collects his interest up front on closing day for the remainder of the month.  Here's a real life example to illustrate:

 Assume you were buying a $300,000 home with a no money required for a down payment, (yes, that’s possible ??) and an annual interest rate of 4.0%. Let’s look at how your closing costs could change depending on when in the month you close:

April 1st = you have 30 days remaining in the month, and therefore 30 days of upfront interest payments (yes, the lender gets paid interest even on the day he makes the loan!)

·        Take your annual interest rate of 4.0% and divide it by 365 to calculate your daily rate = 4% / 365 = 0.011%

·        Multiply your daily rate by your home loan amount for your daily interest amount = 0.011% x $300,000 = $32.87

·        Multiply the daily interest by the number of days between closing and payment to get the total prepaid interest charge = $32.87 x 30 days = $986.10

 But if you closed April 30th, using the same math your total prepaid interest would be $32.87. What a difference! You'd pay $953.23 LESS in pre-paid interest on closing day just by arranging to close at the END of the month. That's very useful to know!

Now that the secret of pre-paid interest has been explained, let’s summarize what we know about the real costs of buying a home, and how to keep those costs small (or at least smaller!) 

To conclude, where we live is incredibly important. It touches every fascist of our lives. We also know most of us will buy a home soon or at least know someone who will buy a home soon, and the costs of doing so aren't always clear. However, once we make sense of those costs there are tactics (like adjusting the closing date) that can make a BIG difference between getting our next home and missing out.

If you have any questions, or if you’d like to buy or sell a home ANYWHERE worldwide, please call or text me at 816.217.8608, or you can E-mail me at [email protected].

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ABOUT EDWARD STEPHENS:

Edward Stephens is a real estate broker and the team lead of The Stephens Group, a team of real estate agents located in Leawood, Kansas - a suburb of the Kansas City Metro in the U.S.A. He is licensed in both Kansas and Missouri but can help you WORLDWIDE.