A Homebuyer’s Guide To Earnest Money

The hardest part’s over because you’ve found the perfect house. Now you have to go through negotiations to buy the house and determine your closing costs. Closing costs are expenses in the home-buying process that typically equal 2% to 5% of your loan’s value, which can make them very pricy if you’re buying an expensive property. Borrowers might be able to reduce closing costs with the right negotiation tactics. Wondering how to lower closing costs? Here are several tips to try before you sign off on your purchase. What are closing costs? Closing costs are fees that occur when finalizing a real estate transaction on the sale or purchase of a house. Once the property is transferred into your name, these fees are due. Both homebuyers and sellers pay closing costs, but it varies who pays closing costs and how much they pay. A home loan amount, a property’s location, and a home buyer’s credit score are some of the factors determining closing costs. Some state laws also require professional services that increase a transaction’s closing costs. Many closing costs are negotiable among homebuyers, sellers, and mortgage lenders. If you’re buying a property, it’s crucial to research and shop around for home loans before choosing a lender. Can closing costs be negotiated? There is some negotiation possible, and the following includes ways to possibly lower your closing costs. Did you review your loan estimate form? Before you close on your home, your chosen lender will provide you with a contract covering all the details of the agreement. In it, you’ll find information such as your monthly payment amount and interest rate, as well as the percentage owed for closing costs. Remember that things like a low credit score can contribute to a higher interest rate, so try to have more than the minimum credit score. In reviewing these numbers, you might find that your closing costs are higher than what you’re willing to pay. Don’t hesitate to shop around at other banks and lenders, which might offer you a better deal, including lower closing costs. Did you research lender fees? Double-check the lender fees you have to pay to obtain your loan, as you can sometimes save money here, too. Your lender will charge an origination fee. You probably can’t get out of paying this, but your loan agreement could contain other negotiable fees. There’s no harm in asking your lender about these. This is an area in which it would help to have other loan possibilities for reference. If your chosen lender tacks on more fees, show them your options and negotiate a lower rate or move on to a new lender. Do you know what you are paying for? It’s vital to understand closing costs before you go into negotiations. Of course, you have your responsibilities as the buyer—you must pay the application fee, attorney fees, credit report fees, and more. But you should also know what the seller should cover on their end of the deal. For example, they should contribute to the closing costs, especially when the market is working in the buyer’s favor. To that end, the seller should also cover the real estate agent commissions. Can you add the closing costs to your mortgage? You can lower or avoid paying closing costs upfront by folding them into your mortgage. Some lenders will be open to this option, wherein they pay the closing costs for you upfront and then tack that price into your home loan. This will save you cash in the short term, but you will end up paying more for your closing costs over time since your loan repayments will come with added interest. Did you look for financial aid? First-time homebuyers might be able to get a bit of financial relief when they purchase a property. Many grants can help lower the costs of the home-buying process to encourage more people to get into the real estate market. For instance, if you choose a Fannie Mae loan to buy one of their foreclosed properties, you might be eligible for closing costs as low as 3%. There are also loan programs for those who have, for example, poor credit history, a low down payment, or veteran status. Local governments or nonprofit organizations may also provide grants for the home-buying process. These programs mostly favor first-time home buyers, and they help cover your down payment and/or closing costs. Did you research vendors? As soon as you get your loan, skip to the part where it describes the vendors who can help you through the closing process. Sometimes the people selected by your bank will charge more than ones you can find yourself. Do your due diligence to ensure you have the least expensive vendors possible. You can ask your lender for other potential vendors they might not have listed on the loan. This research could save you hundreds of dollars in closing costs. How to lower closing costs When figuring out how to lower closing costs, it’s most important to understand where you can save money. Even though each real estate deal is different, there are typical closing costs that homebuyers can expect. Application fee: Before applying for a mortgage, ask your lender if they charge an application fee. If so, make sure you understand what it covers. Application fees are sometimes negotiable, but you might need leverage in your negotiations. That’s why it’s essential to shop around and know what other lenders charge for an application fee. Appraisal: In most deals, you’ll need to pay an appraisal company to assess the property’s fair market value. Sometimes though, you won’t have to pay this fee, so be sure to discuss with your lender. Association dues: If you’re buying a property in a homeowners or condo association, you may have to pay your annual association dues at closing. The buyer and seller can split this cost, and you may owe only a prorated amount of the association’s annual dues if you buy a property partway through the year. Attorney fees: Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have their own legal representation. Courier fee: Your lender may use a courier to deliver documents required to close a deal. Doing so can expedite finalizing the transaction, but you may pay for this courier fee as a result. Credit report fee: Your mortgage lender will run a tri-merge credit report. The reports are your credit scores and history from the three major credit bureaus. Depending on the lender, you may not get charged for this, but you’ll have to ask. Discount points: These “points” represent money you pay your lender at closing to receive a lower mortgage rate. One discount point equals 1% of your home loan amount in exchange for dropping your interest rate by 25 percent. For example, if you pay your lender $1,000 on a $100,000 mortgage loan, your 4% interest rate drops to 3.75%. It’s important to have a conversation with your lender about what your options are with these points, especially since points are not required. Using points makes sense on paper but paying more upfront may not work for everyone. For those who don’t plan to live in their home long-term or are likely to refinance, this isn’t the best option. Escrow deposit and fee: Many lenders require you to have an escrow account for your expected property taxes and homeowner’s insurance premium. Your lender makes your insurance and tax payments for you using the money you deposit into your escrow account. If you’re required to set up an escrow account, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for doing so. Often, home buyers and sellers agree to split this cost. You can ask about these costs upfront to make sure they fit within your budget. (Pro tip: It’s always a good tip to confirm with your city or county that your taxes have actually been paid!) Flood hazard determination fee: The U.S. government requires a flood risk assessment for all real estate transactions. A third party handles the evaluation, and they’ll charge you a fee for their service. You’ll have to pay for flood insurance if they determine your property is in a flood zone. Be sure to keep this possible expense in mind when choosing a property. Homeowner’s insurance: Homeowner’s insurance is usually not required by law, yet most lenders require it. It is a good idea to have it in case of damage to the property, and you’ll usually pay your first year’s insurance premium at closing. Mortgage broker fee: You can hire a mortgage broker to help you find mortgage loans. If you do, they’ll charge you a commission based on the percentage of your loan amount. This is usually between 0.5% and 2.75% of the property’s purchase price. To save money, you could look for loans yourself. Origination fee: Most lenders charge a loan origination fee when processing your home loan application, which is usually 1% of your loan amount. Not all lenders charge an origination fee, however, so, again, it’s essential to research different mortgage lenders. Upfront: You pay the entire cost of your PMI at closing. Split: You pay part of your PMI costs upfront, and your lender folds the balance into your monthly mortgage payment. Monthly: You pay nothing on your PMI at closing, and your lender adds your entire PMI balance to your monthly mortgage payment. Lender-paid: Your mortgage lender covers your PMI costs in exchange for raising your interest rate; this method can save you money at closing but cost you more over time. Recording fees: Local governments require a copy of your title before it will recognize you as the property’s legal owner. Your title company usually handles this transaction, and they’ll charge you a fee for that service. However, that’s not always the case, so be sure to ask. Title search fee: Before you can purchase a property, someone must verify its ownership. A title company handles this process, ensuring no one else can claim the property after you purchase it. The company charges a fee for this service, and it often comes hand-in-hand with title insurance, which protects the buyer from future claims against the property. This fee varies by location and property; it ranges from $200 to $1,000. You can save money by searching for a title company within your budget. Overall, to save money, you should compare lenders and their fees to make sure you’re getting the best possible deal. You’ll see these fees on a document called a closing disclosure. These are the different costs to consider when buying a home. Source: BiggerPockets Blog

Some improvements have limited appeal to home buyers, and may even affect your sale price when you go to sell. One of the best things about owning a home is the ability to change things up, whether it’s knocking down a kitchen wall to open up space or filling your backyard with your favorite fruit trees. That freedom also offers unlimited opportunities to make mistakes, at least when it comes to spending money on home improvements that don't add the value you’d hoped for. Of course not all home improvements are made with an eye toward adding value. Your home is your castle to enjoy as you please. If, however, you’re planning to sell soon , it might be a good idea to consider whether the improvement projects you’re considering will pencil out when you’re ready to move on. Don’t expect a dollar-for-dollar return Modest home improvements that tend to make the home cleaner, safer and more functional are good bets for sellers, according to Zillow® research. However, big-ticket items, such as pools, major kitchen and bath remodels and extensive landscaping undertaken for the sole reason of adding value might not bring the return you hoped for. According to the Remodeling 2023 Cost vs. Value Report , which estimated the return on investment on some common home improvement projects, only four improvements boosted value on resale: electric heating and air conditioning conversion, garage door replacement, manufactured stone veneer and replacing a steel entry door.* What’s more, Zillow research into home features that help homes sell for more — or less — than expected shows that buyer preferences change over time. So a trendy home update made today for the sole purpose of adding value can seem dated — or even detract from the value — in five or 10 years. With that in mind, here are 11 home improvements that might not pay off when you sell your home. 1. Turning your kitchen into a white wonderland According to Zillow research into the paint color preferences of home buyers, a white kitchen can hurt a home’s sales price by more than $600. Instead, today’s buyers tend to prefer dark gray tones such as charcoal and graphite. If you don’t care about the trends at the time of resale or if you plan to repaint prior to selling, you might consider how you want to feel in any given room and paint accordingly. Or you can just go wild. 2. Adding a walk-in closet Zillow’s 2024 research into home listings shows that walk-in closets can hurt a home’s value by 0.7%, a relatively small amount but an indication that it might not be worth the cost to add a space where you can see all your clothes. If you’re tempted to turn a small bedroom into a closet, think twice before doing so. Home shoppers usually search for homes based on the number of bedrooms, and a homes’ value is derived in part from the number of bedrooms it has. Bottom line: a bedroom is going to be more valuable to most buyers than a walk-in closet. 3. Adding a deck A wood deck costs about $17,051, but this home improvement does not add value overall — it only adds $8,553 at the time of sale, a return of about half what you’ll spend, according to the Cost vs. Value report. The cost is even higher for composite materials, and the return even lower: just under 40%. This is one of those features, though, that might transcend costs considerations. If you love a good deck for entertaining, it could be worth it to build it for your own enjoyment, without worrying about whether you’ll get a full return on your investment down the road. And if the deck improves the view from the property, it could make the home more attractive to buyers while allowing you to enjoy a better view in the meantime. Also, home buyers’ enthusiasm for outdoor features remains high, so anything that enriches home life outdoors could be a win. 4. Turning your garage into a bedroom While bedrooms are certainly important, you might not want to sacrifice a garage to create one. Listings that mention garages are associated with a slight sales premium: 0.3%, according to Zillow’s 2024 analysis of listings data. Parking is often tight in urban areas, and with the high price of cars, homes that allow for safe parking could have an edge over homes without a garage that can also serve as a handy storage space. An exception could be if you converted the space into an Accessory Dwelling Unit , also known as an ADU, casita or mother-in-law unit. Zillow research shows that growing numbers of buyers want the ability to rent out all or some of their home . Additional Zillow research suggests that private spaces are growing in demand, and sellers are mentioning “privacy” or “private spaces” in their listings more frequently than in the past. If your home is short on private spaces, it could make sense to convert the garage. If you’re trying to gauge whether a garage is a must-have for most buyers in your local market, consult a local real estate agent . As for that extra usable space that was a must-have during the peak of the COVID pandemic, when people who could work from home did so, it’s possible the return to office work will see a slowdown in listings that mention private space. 5. Installing an in-ground swimming pool This one is a mixed bag. Whether the pool becomes an asset or a liability depends on a number of things, including the pool’s size, age, condition, location on the property and housing market. The main drawback is the cost, and the fact that other projects would be a greater return for the same money. An in-ground pool can set you back about $23,370, according to the home services website Thumbtack, which calculated the national average cost of installing a pool over the last four years. Add in fencing and landscaping, and you’re looking at an investment of nearly $30,000, according to Thumbtack. If you’re a pool person, that is money well-spent. If you’re not, you’re not likely to recoup the cost of building one. A Zillow analysis of 2023 home sales found that homes with saltwater pools sell nearly three days faster and sell for about $5,238 more than comparable homes without one. But depending on the climate, prospective buyers might not want to spend the time and money and vigilance it takes to keep a pool clean and safe. This could translate into fewer views and offers when you go to sell. 6. DIY — done badly We love DIY , and there are plenty of projects you can do yourself to improve your surroundings. But there’s also a reason skilled tradespeople command high prices. Their expertise helps ensure beautiful outcomes that a new buyer isn’t going to have to spend money to redo. When you’re DIYing something for the first time – tiling a bathroom, for example, or installing a hardwood floor – there’s a learning curve that you should account for. If you have a hankering for a feature, and want to see what you can pull off with your own labors, make sure you have the skill to tackle it. Spending big money on materials isn’t going to feel too good if the outcome is poor. 7. Creating a luxury bathroom Bathroom remodels are some of the most expensive improvements you can undertake. Even a simple bathroom remodel can set you back more than $20,000, and won’t necessarily pay for itself when you go to sell. But the more luxury bells and whistles you add, the lower your return on investment. For example, the cost report estimates a $24,000 mid range bathroom remodel would provide about a 67% return on investment, but an upscale one would return only about 37% of the $77,000 such a remodel could cost. 8. Wall-to-wall carpeting Carpet has a lot of upsides, especially when it comes to warmth, and there are a ton of new styles and textures to spice up any space. But carpeting isn’t as popular as some other flooring options. For-sale listings that mentioned new carpet sold for slightly less (0.4% less) than comparable homes without it. Buyers, however, are willing to pay a small premium (1.2%) for luxury vinyl flooring. So if you’re thinking of floor coverings, and you like the feel of carpet on your feet, consider whether you’ll get the same enjoyment from an area rug. 9. Bamboo flooring Bamboo is a relatively inexpensive and more sustainable form of flooring, but it, too, has fallen in popularity. Listings that mentioned bamboo floors sold for 0.8% less than comparable homes. 10. Laminate countertops Changing up countertops can transform a kitchen or bath, but one material never seems to make it to the list of trendy or popular materials, and that’s laminate. Although there are some attractive options that mimic natural and made-made stone for a fraction of the price, homes sold in 2023 that mentioned laminate sold for 1.1% less than comparable homes. 11. High end fixtures If you’ve got the money and derive pleasure from eye-catching fixtures, go for it. But it’s unlikely someone is going to buy your home because they’ve fallen in love with your $3,000 chrome faucet or light fixture. Consider choosing cost-efficient, attractive, well-made fixtures for updates instead. Home maintenance has a big impact on home values A well-maintained home can sell for about 10% more than a similar home in average condition, according to Thumbtack research . So while improvements can add value to your home, regular maintenance will keep your home in better condition so that there are fewer improvements to tackle when you do decide to sell. Some things to keep an eye on: cleaning gutters, resealing grout in the kitchen and bath and having heating and air conditioning systems serviced regularly. Source: Zillow