Closing Costs: How Much Do You Need to Seal the Deal?
Closing costs. Those two words can strike fear into the hearts of many new homebuyers. These days, preparing for closing costs isn’t nearly as stressful as it was before the Consumer Financial Protection Bureau launched the ‘Know Before You Owe‘ program in 2015.
Know Before You Owe helps you choose a lender and shop for closing service providers like a title company and settlement attorney. It also helps you understand the closing process. Best of all, it puts you in charge of the closing process so that you can save money and know exactly what your obligations will be well in advance of closing.
As a rule of thumb, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. These costs vary widely by state and local jurisdiction. Some states set costs for title insurance; in others, title companies compete aggressively. Closing costs typically include a loan origination fee, discount points, attorney’s fees, title insurance, appraisal, property survey and any items that must be prepaid, such as taxes and insurance escrow payments. However, some required services vary by jurisdiction. A number of states require the involvement of an attorney, others do not. Some states require pest inspections and radon tests, others don’t.
Who pays the bills for closing services also varies by state. For example, in Alabama, buyers and sellers negotiate who is going to pay the closing costs and will usually split them equally. About half the states require the buyer to pay the survey fee. In others, it is negotiable. Your real estate agent will be well-versed on local and state closing requirements and local service providers.
Closing Costs are Rising
Like almost everything in real estate, closing costs are going up. In July, the national average for a single-family home reached $5,651 including taxes, recording fees, land surveys and transfer tax, an increase of 16.5 percent from last October, according to an annual survey of closing costs by ClosingCorp, a provider of closing cost data.
The states with the highest average closing costs (including taxes) are:
- District of Columbia: $20,228
- New York: $15,254
- Maryland: $13,358
- Delaware: $13,293
- Pennsylvania: $10,206
The states with the lowest average closing costs (including taxes) are:
- Missouri: $1,856
- Iowa: $1,913
- Indiana: $1,992
- Nebraska: $2,017
- Mississippi: $2,158
You can find a complete list of average state closing costs at ClosingCorp.
Unfortunately, the ClosingCorp survey does not include fees and costs that lenders incur and pass along to borrowers, like their credit check, administrative costs, origination points, and overnight delivery. It does cover third-party vendors, like title insurance, title search, taxes, other government fees, escrow fees, and discount points. Fortunately, the Bankrate website also conducts a national survey of closing costs by state, focusing on lenders’ costs and fees. You can get an average of current lender-related costs by state.
When you are putting together your budget for your home purchase, you can get a rough estimate of what the bill will be for all your closing costs by adding together the costs from both Bankrate and ClosingCorp. (Both surveys include appraisal costs, so you should deduct appraisal from the Bankrate total.)
You will end up with a total that is still only a rough estimate of what your actual closing costs will be because it will be based on averages for your state for each cost. Closing costs can vary significantly by loan size, lender and the third parties, like the title and settlement providers that you choose. Review your estimates with your real estate agent, who will be familiar with the costs charged by lenders and local vendors.
Know Before You Owe
By the time that you need to get serious about selecting a lender and planning for closing costs, the Know Before You Owe program kicks in. The Know Before You Owe program requires lenders to provide you exact amounts you will incur and estimates for services from third parties before you come to the closing table.
The program features two forms – a loan estimate that you will receive from each lender to whom you apply and a closing disclosure, which lists all your final closing costs, including a total for the cash that will be required, in time for you to review them before you close.
Each Loan Estimate will include estimates for charges controlled by the lender such as origination costs and administration fees. These estimates are binding and cannot change before closing. Some charges, such as the cost of services from vendors that the lender recommends, cannot increase by more than 10 percent.
Finally, there is no limit on charges for estimates over which the lender has no control. These include prepaid interest, property insurance premiums, initial escrow account deposits, and services required by the lender for which you have shopped separately and chosen a service provider that is not on the lender’s written list of providers.
Shop for Lenders and Closing Services
The Know Before You Owe program was designed to help buyers shop for lenders and closing services, yet more than half of borrowers talk to only one mortgage lender before making a choice. A recent study by Lending Tree estimated that borrowers would save tens of thousands of dollars over the life of their mortgage if they shopped for a lender.
Loan estimates are terrific tools to help you shop for a lender. The estimates on page 2 section A of the form lists origination fees. These are binding estimates for lenders’ costs that include administrative fees and underwriting fees. By applying to three lenders and selecting the one with the lowest total origination fees, you could lower your monthly mortgage bill by as much as $279 a month.
You can also save by shopping closing services. On page 2, section C of the loan estimate, lenders will list services for which you can shop. You can shop around for these services and select a vendor who will cost less, or you can use the lender’s suggested vendor. The greatest potential savings may be title services and settlement attorney. Keep in mind that cost is not the only consideration. Your potential savings in closing services will total a few hundred dollars, far less than you can save by shopping for a lender. Keep in mind that working with a vendor you trust might be a better choice than the least expensive vendor.
Your lender will provide you a closing disclosure form at least three days before your closing date. The form will include totals for the loan among your monthly mortgage payment, total closing costs and a total amount you will need to close.
Check all the costs to be sure they match the closing estimate from your leader. If you shopped for closing services, they would be listed on page 2, section C. Check to be sure they are accurate. Remember, certain costs can increase by any amount, and some can increase no more than ten percent. Some costs cannot change at all from the numbers in your loan disclosure — see the full list of services in each category.
Take some time to read the discussion from the CFPB on Know Before You Owe before you apply for a mortgage. Think about how hard it used to be to figure out your closing costs before this program took effect there years ago, and take advantage of the new tools at your disposal.