Here’s a riddle…what cost almost always tricks up the first-time home buyer? Two words: closing costs. That means appraisal fees, local taxes, insurance fees, and many other line items, due at close of escrow. Many home buyers seeking their American dream don’t know that they need to pony up an average of 1-2% of the total cost of the home and mortgage amount before the sale closes. Plan for closing costs by understanding what they are, how much you will pay, and ways to decrease costs.
Keep the Faith
…As in Good Faith Estimate, or GFE. Everything starts with a ballpark price of all the expenses associated with the closing costs, and is supplied by your mortgage lender within three days of applying for your loan (it’s the law). The GFE is typically 15% higher than the final closing costs for a good reason, too. “If the final closing fees are higher than 10% of the Good Faith Estimate figures, the lender has to redisclose the fees and start the loan disclosure timeline over again, which could delay escrow closing,” said Liz Glazener, Escrow Officer at Old Republic Title Company, a 12-year veteran of the industry.
Avoid Pain By Planning Ahead
One of the biggest “gotchas” when it comes to closing costs is not planning for it. “Even though every buyer purchasing a home pays for these costs, whether cash or mortgage, they tend to pay closest attention when they see the actual figures at the signing table,” Glazener said. A home buyer will receive the final closing costs amount near the date of the sale, typically 3-5 days, depending on the escrow timeline. “Whatever your timeline is, the final costs should be explained by a loan agent or title company escrow officer,” she said.
Pay Now or Pay Later
If you are strapped for cash at closing time, or want to delay those costs for any reason, there are alternatives, but you will end up paying one way or the other. One method is to roll closing costs into your monthly mortgage, but it will be at a higher interest rate and increased mortgage amount. This may make sense if you plan to sell or refinance your loan at about five years-that’s about the break-even point. For a 30-year fixed loan, it will end up costing you more to pay closing costs this way. Try a closing cost calculator to compare different options.
Potential Savings on Closing Costs
Looking for ways to cut down the grand total? Give these a shot:
- Find a title company on your own that offers cheaper pricing-most lenders and real estate agents have preferred title companies they work with, and price isn’t the consideration
- Some closing costs are tax-deductible –take advantage of these on April 15
- Scan for closing cost “junk fees” (fax fees, courier fees, etc.): question them and discuss getting a price reduction
- In some situations, the seller might offer a closing cost credit (for instance, the hot water heater needs replacing). Not typical in a sellers’ markets but it does occur in general.
Above all, be prepared financially and mentally for these costs at the end of your house-buying journey.