Unless you’re LeBron James, it takes a long time to save for a down payment on a house. The rest of us sacrifice our gourmet coffee for the lukewarm in-office drip in the hope that setting aside a few dollars a day will magically compound into enough to buy our piece of the American Dream.
And just when we think we have the necessary funds to make even the minimum 3% down payment, we’re slapped with another round of expenses: closing costs.
Closing costs typically amount to 3% to 6% of the purchase price. Why the broad range? Taxes. Buying a house means paying taxes and sometimes transfer fees upfront, at the closing. While there are settlement costs that go to your attorney, title insurance company, and lender, the biggest beneficiary is the government—city, county, and state.
Need some salt in that wound? Closing costs increased 6% last year and now average $2,539 on a $200,000 loan, according to Bankrate.com. Likewise, Bankrate.com says origination fees (i.e., lender commissions) also increased 9% to $1,877, while appraisal fees rose 1% to $662. (Bankrate.com did not factor real estate taxes and transfer fees into its analysis, which accounts for the discrepancy between its estimate and the more general 3% to 6% estimate.)
In every real estate transaction, there are closing costs. Everyone and anyone who had anything to do with the transaction has their hand out at the closing. That means the title company prints multiple checks to pay the brokers, the surveyor, the attorneys, the courier, and anyone else who can stake a claim against the property or its owner. So if you had your property staged and asked that the decorators be paid at closing, then they too get a check. If you had the bathroom remodeled and told the contractor you would pay them when the house sold, it’s now payday.
Just to make it more confusing, closing costs vary by location. Every state, city, and county has the authority to add fees, sometimes called transfer taxes or impact fees, to your transaction. Closings, in essence, are a money grab.
Texas has the highest closing costs in the country, according to Bankrate.com. Nevada has the lowest.
Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender’s good-faith estimate for an itemized list of fees. Then use your GFE to comparison shop with other lenders.
But don’t despair, there are ways to circumvent the added expenses:
1. Look for a loyalty program. Some banks offer customers help with their closing costs, if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for preferred reward members. It’s the bank’s way of offering a reward for being a customer.
2. Close at the end the month. One of the simplest ways to reduce closing costs 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? 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.
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.
6. Join a union. AFL-CIO members get closing-cost discounts and rebates of up to $2,500 on real estate transactions when they get a mortgage through Chase. But only if they live in New York.