Closing costs are a mystery to many homebuyers, who understandably might not know how much they’ll pay, why they’ll pay that amount and what it’s really for when they buy a home.
Why it matters: Closing costs can add thousands to your home purchase. Builders often offer incentives, but buyers need to know the fine print before assuming it’s a deal.
Closing Costs 101
Many buyers don’t fully understand closing costs, which can include:
Mortgage origination fees
Transfer taxes and recording fees
These costs can run into the thousands.
Builder Incentives
Many builders offer incentives if you use their preferred lender. These can total thousands.
“It actually may be less expensive to buy a new home than a resale,” says Ron Sozio of Wells Fargo.
Typical incentives run 2 to 5 percent, but what that percentage applies to matters:
Base price
Total sale price
Loan amount
Be savvy as you negotiate as two percent of the sale price could be more than three percent of the loan amount. The difference can be significant, especially if the buyer’s down payment is a big one as a percentage of the sale price.
Preferred Lender Requirement
Builders usually require you to meet with their lender, even if you finance elsewhere.
Why builders push their lender:
They profit from the financing
They can oversee the process more closely
But it can also make things easier for buyers. It’s often a less stressful endeavor to work with the builder’s preferred lender.
Compare and Negotiate
You don’t have to use the builder’s lender. By law, you can shop around. You do have to be preapproved or prequalified with the builder’s preferred lender before you can go into contract.
It’s not always clear whether the builder’s package is a better deal than a loan from another lender without the incentive. That means buyers must shop around and compare lenders’ offers.
Other lenders may offer closing cost credits to compete. Interest rates are locked in for 30 years. Compare the difference of a lower interest rate to the incentive being offered.
Who Pays What?
Not all incentives are equal. Some builders shift customary seller costs – like title insurance or transfer taxes – to the buyer. Be on the lookout for incentives that cover costs that traditionally are seller costs.
Bottom Line: Builder closing cost incentives can save thousands, but the value depends on how they’re structured and who pays what. Shop around, compare offers, and use competing quotes to negotiate.
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Marcie Geffner
Marcie Geffner is an award-winning freelance reporter, writer and editor in Ventura, California. In the last decade, she has penned more than 1,000 published stories about residential and commercial real estate, banking, credit cards, computer security, health insurance and small business, among other subjects. Editors describe her as “detail-driven,” “conscientious,” “smart” and “incredibly versatile.” Her award-winning reporting has been lauded as “rock solid,” “spot-on relevant,” “informative,” “engaging,” “interesting” and “nuanced.” Her stories have been cited in seven published nonfiction books and two U.S. Congressional hearings. Prior to her freelance career, Geffner was senior editor of California Real Estate magazine. Later, she became managing editor of Inman.com, an independent real estate news website. She also has prior employment experience in technical writing, corporate communications and employee communications. She received a bachelor’s degree in English with high honors from UCLA and master’s degree in business administration (MBA) from Pepperdine University in Malibu, California. She enjoys reading, home improvement projects and watching seagulls at the beach.