Closing costs differ based upon a variety of different factors, but a good lender listens and structures a deal advantageously for their buyer
- Non recurring closing costs
- Lender help with closing costs
- Seller help with closing costs
Last week, we talked about how much money a buyer will have to put down as a down payment to buy a house. The answer, as with almost everything related to the mortgage industry, was that it depends. This week, we will look to answer the question, “how much money does it cost to close on a house?” We will discuss total cost for closing, various different ways a deal can be structured in order lessen that burden, and what a buyer should consider during the entire process.
Disclaimer- not all deals are the same- the following is generalized but typical
Closing costs, according to the CFPB are broken down into 7 or 8 different buckets, but like most things the government does I believe that to be silly and pointless. I’m going to skip what I don’t believe is helpful to the buyer and instead try to simplify it into the most understandable format possible. Think of closing costs 2 ways:
- Costs that you are going to have to pay one time and one time only;
- Costs that you are going to pay every day, week, month or year.
The first kind of costs- the cost that you pay one time and one time only, are called non-recurring closing costs.
Generally- we don’t charge an origination fee BUT (and this is a huge but) run screaming to the hills away from any lender that brags that they don’t charge an origination fee, ever. This means, literally, that they are close minded and not thoughtful and not treating you like the individual you deserve to be treated like.
As it says in the good book, or as those 60’s beatnik rockers The Byrds sang, there is a time and place for everything. A turn, turn, turn if you will. I will pause now to let you take in the awesomeness of the Byrds with one of my favorite songs ever (which was only written either 10 years or 3500 years before I was born however you want to reckon that crediting the author)
Typical closing costs- Non-recurring
- Underwriting Fee- Typically $599-$800 depending upon the lender we use (we have 10 or 12) and the type of deal
- Appraisal- $450-$600 typically, with the higher end being more likely for investment properties or government deals
- Processing- $450
- Credit report- $100 typically
- Tax Service Fee/Flood Cert fee- $100 typically- not all lenders charge this fee
- Attorney doc prep fee- $425
- Title Company Escrow Fee- $400 (depends on the title company and the area. I’ve seen as low as $250 up to $500)
- Recording Fee- $150
- Mortgagee policy of Title- $100.00 (state regulated)
- Title Endorsements- $200 or so (this is my stand in- it can be a little more for a really expensive house- less for a lower priced house)
- Survey: (Lot/block- $450, acreage- variable) If the seller has a property survey and they haven’t changed the foot print of the house we can use that and there’s no cost to the buyer. Probably 70% of my buyers aren’t buying a survey.
- Total- $3,000 *Assuming seller is paying for owners policy and provides survey, as is typical. Very little of this is based upon sales price, really just the title endorsements. Government loans typically cost more in u/w and appraisal, so you might tack on an extra $200 or so for an FHA or VA loan or the like
These are the costs that are not one time costs, and that reoccur every day, week, month or year. While the non-recurring closing costs are pretty standard 3rd party fees, the costs here are going to be much more dependent upon the sales price of the house, and the house itself.
- 1 year of insurance- up front- You must pay for a full, 1 year policy, at the time of closing. Insurance can be shopped by the borrower of course, and they get to pick the agent and the policy that they want to deal with, but typically I pencil in insurance as 1% of sales price. Shop around!
- Escrow Account funding: Depending upon the time of year and the actual address this varies totally- but quick and dirty consider the net on this to be 3 months worth of taxes and 3 months of insurance. So, in Texas for every $100,000 borrowed typically the escrow account will equal about 1% of the sales price, total, to fund the escrow account (1% insurance + 3% taxes =’s 4% for the year, divided by 4- to make 3 months worth =’s about 1%)
- Per diem interest: Interest rate X Loan amount/365 to get per diem. Multiply per diem by number of days remaining in the month of your closing. So, if you close on the first day of the month you are multiplying your per diem by 30 or 31 days, on the last day of the month you will multiply by 1 day.
- HOA fees: Typical HOA fees are due at the beginning of the year and are paid for the entire year, which means the buyer needs to reimburse the seller for the rest of the year.
- Total- 2.00 percent of the sales price of the house. In most cases this is a little high b/c insurance generally doesn’t cost a full 1%, and the property generally isn’t on the tax rolls for full value of sales price, but this is a good, rough estimate for how much they could run. As soon as we get an actually address we are able to figure this amount out exactly.
- * If you put 20% down and don’t want an escrow account then you don’t have to worry about any of these prepaids, as you just pay your taxes and insurance yourself and move on down the road- but if you are putting 20% down on your house you probably aren’t reading my blog post wondering how much closing costs will run you.
Lender paid closing costs:
If you don’t like the idea of coming up with your minimum down payment, plus $3,000 in non-recurring closing costs, plus 1.75-2.% of the price of the house in prepaids, I can certainly help you with your closing costs- but it comes at a cost- mainly a higher interest rate. This isn’t a bad thing, per se, but it’s something to discover and talk about and it’s why I stress the importance of dealing with a lender that listens to you because the best mortgage professionals listen!
An example with easy math (because I always like easy math. Lets say you are buying a $200,000 house and your closing costs are $6,5000. If I’m not chipping in for closing costs I’d give you a no origination loan 4.0% at today’s rates. Your monthly Principal & Interest would be $937. If, however, you wanted me to give you say $4,000 in closing costs your new P&I payment would be $1050. So, if you conceptualize that as me dumping a duffel bag full of cash on your table with $4,000 in it I’d be asking for $100 a month in payments. It’d be better if I gave you, say $3600 cash at 4.5% for an interest rate. Then, your payment would only go up $55.00 a month. That means, as long as you are out of your mortgage in less than 5.5 years you should take the money from me. But, your seller might give you the money cheaper- watch here for the same scenario…
Seller Paid closing costs:
Lets say, instead, that you asked the seller for $6,500 worth of closing costs. If the house appraised for $206,500, you could come in with an offer on his $200,000 house for $206,500 and ask for $65oo in closing costs. It all ends up the same to him- he’s netting $200,000, he should be happy to do that deal. Now, at 4.0% interest that $6500 extra you paid for the house would cost you $31.00 a month. This is a really good deal, b/c as long as you were not in the loan for more than 17 years you would come out ahead.
Every house purchase is a little different. There is not a one size fits all approach, as there are a ton of moving parts involved in any real estate transaction. There is an inherent tension between sales price seller is willing to accept, interest rate lender is willing to give you, and money that you will have to put down when buying a house. The fact of the matter is, that a ton of people are involved in any real estate transaction, and like you, all of them wake up in the morning and go to work with the expectation that they will be paid for their services, in some form or fashion.
Figuring out the most efficient way to do that in a transaction where everyone wins (including, of course- you as the buyer) is complicated. You need somebody to talk through it with you to make sure you are getting the deal that works best for you. I’d love to be that somebody for you. Please call me at 832-557-1095 or email me at firstname.lastname@example.org, it’s always a free consultation and I’m always happy to be another set of eyes and ears before, during, or after any transaction you may enter into.