Closing Costs Decoded

By: Jerry

Hopefully your real estate agent discussed the issue of closing costs with you well before looking at homes. Closing costs need to be considered at the beginning of the buying process because they play a significant role in all real estate transactions and can even effect whether or not you're able to buy the home of your dreams.

Below we decode closing costs for you so there are no surprises along the way.

What Are Closing Costs?

"Closing costs" is a sort of catch-all term used to describe the various fees and expenses involved in a real estate transaction, in addition to the cost of the home itself. Both buyers and sellers are responsible for paying certain closing costs, however who pays for what is all negotiable. So, before submitting an offer on a home it's in your best interest to have a good idea what the closing costs will likely be.

Closing costs are primarily paid out to the lender, title company and real estate agents working the transaction and the title company is in charge of making sure the correct parties are paid what they're owed. Buyers also need to be aware that closing costs encompass one-time fees for the most part, but reoccurring fees such as taxes and home insurance are also often factored in to the total.

The HUD-1 Statement

The HUD-1 Statement is the legal document that lays out the various closing costs and who will be paying them.  The HUD-1 Statement is prepared by the title company and is typically given to the seller and buyer to review 24-48 hours prior to closing. The importance of reviewing the HUD-1 statement can't be stressed enough. If you wait to make corrections until the day of close it can delay the transaction.

Good Faith Estimate (GFE)

The Real Estate Settlement Procedures Act (RESPA) requires that lenders provide would be borrowers with a Good Faith Estimate within 3 days of applying for a loan. The Good Faith Estimate lays out approximate settlement costs for a loan and are prepared using a standard form so that it's easier to compare offers from various lenders.

Any questions you have about the GFE need to be addressed as soon as possible. If a lender fails to give you a GFE look for another lender that's following the RESPA laws.

How Much Are Closing Costs? 

Typically closing costs will be 2-4% of the cost of the home. However, the loan origination fee and loan discount points, which both roughly amount to 1% of the loan, can greatly alter the closing cost total. Below is a breakdown of typical closing costs based on a $100,000 loan.

• Ÿ  Loan application fee: $75-300
• Ÿ  Credit report check:  $20-60
• Ÿ  Loan origination fee (typically 1%): $1000
• Ÿ  "Points" (typically 0-3%): $0-3000
• Ÿ  Title search: $150-250
• Ÿ  Title insurance fees:  $250-500
• Ÿ  Lender's attorney: $150-400
• Ÿ  Appraisal: $150-600
• Ÿ  Homeowner's insurance (reoccurring fee): $450-600
• Ÿ  PMI (private mortgage insurance):  $750-1500
• Ÿ  Inspections:  $175-350
• Ÿ  Survey: $125-400
• Ÿ  Recording fees (varies by county): $75-200
• Ÿ  Document Preparation: $75-300
• Ÿ  Escrow deposit for taxes (reoccurring fee):  dependent on tax rate
• Ÿ  Partial month's interest: dependent in interest rate and
• Ÿ  Realtor commission (typically paid by seller): 3-6% of purchase price

Bear in mind that the laws vary from state to state; for instance, some states no longer require private mortgage insurance. These differences have a significant impact on how much you pay in closing costs so make sure to research the average costs for your state, county and city.

Additional Closing Cost Considerations

Here are a few other things to keep in mind when considering how much closing expenses are going to figure into the up-front cost that you'll have to come to the table with.

• ŸMake sure there's no Yield Spread Premium on your GFE.  A yield spread premium is a kickback that's paid to your mortgage broker if he lands you a mortgage with higher interest rates.  If that's the case, it may be in your best interest to keep shopping around for a better mortgage deal.
• ŸRoll closing costs into the mortgage.  This is fairly common, especially in a down housing market with motivated sellers. This strategy can save you money up-front, however when you include closing costs in the mortgage understand that you'll be paying interest on it for the life of the loan.
• ŸAsk the seller to split the difference with you on the closing costs.  Everything is negotiable in real estate, including closing costs. If a homeowner seems motivated to sell, negotiate for them to cover a portion or all of the closing costs. You can also negotiate for what's called a "seller concession," a formula where the selling price of the house is increased to account for covering the closing costs.
• ŸNegotiate with your lenders to lower fees. The best case scenario for a lender is a borrower that doesn't ask questions. After receiving the GFE go over it in detail and list any fees that don't seem necessary or exorbitant (such as underwriting and administration fees), because they most likely are. Enlist the help of your real estate agent or lawyer to identify such fees then negotiate with the lender to have them eliminated or lowered. 

 

Things get complicated and costly very quickly once a transaction is already underway.  That's why you want to be prepared to begin with and have a plan for how you'll handle situations as they arise. A knowledgeable and experienced lawyer or real estate agent can also give you a serious advantage when it comes to minimizing expenses during the home buying process.

 

Don't be afraid to play hardball over closing costs, and if things aren't going your way, don't be afraid to threaten to take everything off the table.