Buyer’s Closing Costs

Update as of December 2015: Please note the HUD-1 has now been replaced with a CLOSING DISCLOSURE, and GFEs have been replaced.  Contact us for more info or to discuss the differences in these documents!

Many buyers are aware that there are fees related to the purchase of a new home—a rough guide is 2.5% to 3% of the transaction value—but what are these fees, and are there ways to minimize them?

First, a few clarifications. Both buyers and sellers have closing costs in a transaction. The sellers’ costs are typically much higher than the buyers’ fees because the sellers pay the commission for both real estate brokers. These fees are typically paid at closing—they come out of the sellers’ proceeds, and the buyers can either pay cash, or can negotiate to have their portion of the closing costs paid by the seller (read more here.)

For now, let’s focus on the buyers’ fees. Your lender should provide you with a Good-Faith Estimate (GFE) when you apply for a loan. This GFE is essentially an estimate of your “HUD-1” form, which you will receive at closing. Each lender has their own preferred format, but you should be able to compare apples-to-apples by looking at the section headers, or, even better, the line-item numbers. It’s important to note, though, that lenders only control certain sections, while others may be simply based on their own experience. When comparing lenders, it’s important to focus only on the line items that the lender actually controls.

The fees vary by jurisdiction, broker, and settlement attorney, but below is a good way to categorize them:

  • Pre-paids: These are generally required by the lender, and may include insurance, property taxes, and interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
  • Points: A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands of dollars, so it’s important to discuss this with your agent and your lender.
  • Fees: These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. These fees can generally be found on your Good-Faith Estimate in the 800 section, but look in the 1300 “Additional” section, too. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
  • Title Insurance: This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one-time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This fee is addressed in the 1100 section.
  • Government and Transfer Charges: These are fees that are paid to the local jurisdiction and can be quite substantial. For example, in the District of Columbia, the transfer taxes (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers pay $1 per $1000 in value for their transfer taxes.

This is just a high level summary of some of the most common items on a HUD-1, so be sure to ask your agent to walk you through the expenses and strategize with you on how to minimize your costs! Read more about how to spot “junk fees.”

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Mortgage Rates Hit Historic Lows: Should I Refinance?

Back in 2008, I wrote a blog post about refinancing, and given that rates are once again reaching (new) historic lows–in the 4.5% range for 30 year fixed money up to $729,750!–I thought it was time to revisit, and update, the post.

When deciding whether to refinance, the best thing to do is calculate the break even number of months where your closing costs equal the savings in your monthly payment. If you’re going to be in the new loan that number of months, then you should seriously think about locking in that savings.

Historically, a rule of thumb is that if rates are 1% lower than what you’re currently paying, you should at least look into it. Remember rates change several times each day, so don’t be surprised if you call one day and then the next day rates are back up again. The decision of whether refinancing makes sense for you — even with a 1% drop in rates — can get complicated very quickly given our recent market conditions though.

You need to think about is the current market value of the home and your equity in it. That’s important because if you got a loan a few years ago, credit conditions have changed dramatically and you may not be happy with the loan options available to you right now, even if the rates are low. For example, if you have two trusts on your current home loan (popular a few years ago in order to avoid paying Private Mortgage Insurance) then that option is no longer available. Banks are requiring private mortgage insurance for anything higher than 80% Loan-To-Value (LTV) – in other words, unless you have 20% equity in your home, you will be required to get one loan and pay the PMI. Second trusts are no longer available in almost any situation. In fact, it’s rare to find a bank willing to lend more than 90% of the current market value of the home, which becomes an issue if your home has depreciated in value. So if you have two trusts it may not be as lucrative for you to refinance as you think, even with lower rates. Similarly, if the home has depreciated at all then you may run into issues as well because your LTV has changed and you will have to pony up some big cash to make up the difference in your “underwater” home.

Let’s take an example: Let’s say you bought a home at $400K with $20K down. Let’s say further that now it’s worth $390K. (The bank will require you to pay for a non-refundable appraisal, which costs about $350-400, to justify the current value of the home before you refinance. And the bank has to choose the appraiser, so don’t bother paying for one on your own and then shopping it around.) The bank may only be willing to lend 90% of that amount (depending on your credit and other factors), or $351K. But you only have $20K equity in the property and still owe $380K. That means in order to finance you have to come up with the difference of $380K-$351K = $29K PLUS your closing costs (similar to costs when you first purchased, and includes county fees, lender fees, title fees, etc.)

Even if your property hasn’t depreciated at all,  the bank’s new policy could very well be to lend no more than 90%, and then you only borrow $400K * 90% = $360K, leaving you to still come up with $20K (= $380 you owe less the $360 the new bank is willing to lend) PLUS closing costs.

Finally, even if the property hasn’t depreciated, and even IF  the bank is still willing to lend you 95% of the value—in this example the entire $380K you owe—then your payment still may not be as low as you expect because now you’re required to have a single loan at 95% LTV which requires PMI (rather than your current two trusts at 80% + 15%).

Closing costs can generally be rolled into the loan amount if you have enough equity to meet the LTV requirements. But unfortunately a lot of people will have to come up with cash if they want to refinance. But if your property has held its value, and/or you have sizable equity in it, then it’s almost definitely worth it to re-fi. So the bottom line is that there are a lot of variables to determine whether or not it’s worth it to refinance. It’s best to talk to a lender to figure out your specific situation. Contact me if you want my recommendations on lenders I would (and do) personally use (my recommended lenders can lend nationwide).

Closing costs, by the way, vary by lender and by settlement company, just like with a purchase. When a lender gives you a good faith estimate, you should focus  on the “Lender Fees” to see what they’re charging you, and compare that across lenders to find the best deal. Those fees are  negotiable. But banks need to make money too, so don’t expect them to charge nothing. Also look at the settlement company fees, also somewhat negotiable. You do NOT need to use the settlement company the bank recommends. Contact me if you want a recommendation on who I personally would use.  (I always recommend local settlement companies, so sorry for those readers outside the DC metro area.)

Paying Points: Whether or not to pay points to get a lower rate is a judgment call, and depends on how long you’re going to stay in the property. A point equals 1% of the loan amount. So you might get a quote for 4.785% (no points) and 4.5% (1 point). If you have a $380K loan then that means you pay $3800 at closing to get the 4.5%. So you just calculate the savings in payment, divided by the $3800, and that gives you the number of months you need to keep that loan in order to make it worthwhile to pay the point.

So as you can see there are several variables in the decision of whether or not to refinance, so the best advice I can give is to (1) have a realistic idea of what your home is worth and (2) talk to a lender. Even if you start down the re-fi road and one of these scenarios ends up being bad news for you, the worst case is that your out the $400ish for the appraisal and you keep your current loan.

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FHA to cut Seller Contribution to Closing Costs to 3% of Sales Price

Within the next few months, it’s going to get a little tougher for FHA buyers.  Starting sometime this summer, FHA will make official its announced policy of limiting the seller contribution to buyer’s closing costs (aka “seller subsidy”) to 3% of the purchase price, down from 6%.

What fees make up the buyer’s closing costs?

The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:

  • Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
  • Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
  • Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge.  Broker’s and attorney’s fees are scattered throughout the closing statement sections.
  • Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
  • Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

In our local DC and Northern Virginia area, traditionally closing costs have run about 3% anyway, so the impact will likely be minimal for most buyers in our area.  But for those buyers who are struggling to come up with cash for the down payment AND closing costs, this reduction could put a last minute wrench in their purchase.  Plan accordingly.

Read More: Buyer’s Closing Costs

Learn More: Attend a free first time home buyer class.

Read More: Will new FHA rules kill condo sales?

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