Plus: How to Reduce Closing Costs…

By Judy Dutton

When you get a mortgage to buy a home, you’ll have to pay closing costs: These fees, paid to third parties to help facilitate the sale of a home, typically a total of 2% to 7% of the home’s purchase price. So on a $250,000 home, you can expect the amount to run anywhere from $5,000 to $17,500.

Now that you have a sense of the ballpark numbers, here is everything home buyers and home sellers need to know about closing costs.

Who Pays The Closing Cost, and When?
After saving up to purchase a new home, getting pre-approved, and making a down payment, it’s hard for buyers to accept that they’ll have additional out-of-pocket expenses. Some good news, then, is that both buyers and sellers typically pitch in to cover closing costs, although buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some expenses must be paid upfront before the home is officially sold (e.g., the home inspection fee when the service is rendered), and others, like property taxes and homeowners insurance, are recurring, most are paid at the end when you close on the home and the keys exchange hands.

Who Pays The Closing Cost, and When?
After saving up to purchase a new home, getting pre-approved, and making a down payment, it’s hard for buyers to accept that they’ll have additional out-of-pocket expenses. Some good news, then, is that both buyers and sellers typically pitch in to cover closing costs, although buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some expenses must be paid upfront before the home is officially sold (e.g., the home inspection fee when the service is rendered), and others, like property taxes and homeowners insurance, are recurring, most are paid at the end when you close on the home and the keys exchange hands.

What Can Buyers Expect To Pay?
Homebuyers pay the majority of these costs since many of these fees are associated with the mortgage.
“If you’re paying cash for a property, there are still a few closing costs, but they are significantly less,” says Cara Ameer, a Realtor® in Ponte Vedra, FL
Here are some of the fees home buyers should brace themselves to pay:

• A loan amount origination fee, which lenders charge for processing the paperwork for your loan.
• A fee for running your credit report.
• A fee to underwrite and assess your credit worthiness.
• A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.
• A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.
• A fee for a title search to unearth any liens on the property that could interfere with your ownership of it. Title insurance protects the lender and buyer from claims against the home and property.
• A survey fee if it’s a single-family home or townhome (but not condos)
• Taxes, also called stamp taxes, on the money you’ve borrowed for your home loan.
• Private mortgage insurance is an additional fee that buyers can expect to pay if they can’t come up with a down payment that’s 20% of the purchase price.
• Discount points, or mortgage points, are fees paid right to the mortgage lender in exchange for a lower interest rate. One point is valued at 1% of your mortgage total. It may seem like a lot to pay upfront, but doing so will lower your monthly mortgage payment.
• One-time fees may also include document recording fees for the deed and mortgage, buyers’ attorney fees, real estate agent commission.

Buyers should also account for the following:

• An escrow deposit, managed by a neutral third-party escrow officer, covering typically two months of prepaid property taxes and mortgage insurance payments

How Much Can Sellers Expect To Pay?
Here are the fees that sellers are typically responsible for:

• A closing fee paid to the title insurance company or attorney’s office where everyone meets to close on the home
• Taxes on the home sale
• A fee for an attorney, if the home seller has one
• A fee for transferring the title to the new owner

While this doesn’t seem like much compared with what future homeowners have to cough up, keep in mind that sellers typically pay all real estate agents’ commissions, which amount to 4% to 7% of the home’s sales price. So, no one sneaks through a home closing scot-free.

Why There’s No Such Thing As Typical Closing Costs?
The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up, like so-called ‘flip taxes’ that condos charge sellers.”

Texas has the highest closing costs in the country, according to Bankrate.com. Nevada has the lowest.

How To Estimate Closing Costs?
To estimate these, plug your numbers into an online closing costs calculator, or ask your real estate agent, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile, sellers should receive similar documents from their real estate agent, outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.

How To Reduce Closing Costs?
While there’s no way for you to outright dodge these fees, there are ways that homeowners can pay vastly less.

Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender’s good-faith estimate (GFE) for an itemized list of fees. You can also use your GFE to comparison shop with other lenders.

Here are some ways to circumvent the added expenses:

1. Look for a loyalty program. Some banks offer help with their closing costs for buyers if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for “Preferred Rewards” members. It’s the bank’s way of offering a reward for being a customer.

2. Close at the end of the month. One of the simplest ways for you to reduce your closing costs as a buyer is to schedule your closing at the end of the month. If you close at the beginning of the month, say March 6, you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.

3. Get the seller to pay. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller. Don’t expect this to happen much in hot markets where inventory is scarce (which is almost everywhere these days).

4. Wrap the closing costs into the loan. You’re already borrowing probably hundreds of thousands of dollars—why not tack on a few thousand more? Mortgage lenders charge more for this, but if you don’t have the cash, it’s a way to get into the house with less cash upfront. You may want to consider a no closing cost mortgage. With this type of mortgage loan, the lender covers the fees, but you’ll be paying a higher interest rate for the duration of the loan, which will mean larger mortgage payments.

5. Join the army. Military members have closing-cost benefits that are often overlooked. Service members and veterans may qualify for funds to help them purchase a home. These benefits are not limited to the VA loan. The key is to do the necessary research to make sure you get everything you are entitled to. Visit usmhaf.org for more information.

6. Join a union. AFL-CIO members can get help purchasing or refinancing a home with closing-cost discounts and rebates from the Union Plus Mortgage program.

7. Apply for an FHA loan. Americans with lower incomes can apply for an FHA (Federal Housing Administration) loan, a government-backed mortgage. Buyers can get a bit of help from interested third parties including real estate agents, sellers, and mortgage brokers, who can pay up to 6% of the new loan amount. FHA loans are also a bit more lax on credit scores. Borrowers whose credit score is 580 or higher are likely to qualify, whereas traditional lenders require a credit report to reflect 620 or higher.