This past Sunday, there was an article in our Sunday paper which was entitled "As closing costs drop, you'd better shop around." It was written by Bankrate.com, and it basically stated the cost a borrower needs in order to close has dropped by 7% in 2015 over 2014. When I read the title, I thought something along the lines of, "Really? I could swear my clients are paying more!"
The article went on to state that Bankrate requested estimates from various locations, asking for the closing costs for a $200K mortgage for a single family home for a borrower with 20% to put down and excellent credit.
My next thought was, "hmmm, that's not an average buyer in my area." Most people who take out a $200K mortgage are first time home buyers who are buying a home that is priced just slightly more than that; most do not have 20% to put down, and I would dare say the majority have good credit, but not excellent. Putting that aside, I read the rest.
The article's bottom line was that lender origination fees plus inspection and appraisal costs are now approximately $1,847, a reduction over 2014. However, the article continues, that does not include variable costs that could add another $2,500 to $3,000 to your closing costs depending on where you live. And those variable costs include homeowners insurance, discount points, title insurance, taxes and other costs.
The HouseKat says, "Hogwash!" to the variable costs and therefore total costs of a closing. While the origination fees, inspection and appraisal may indeed be somewhere around $1,847, that is such a small part of the total costs that it is really irrelevant to the big picture. Stating that costs for closings are going down, and then using only those three fees to demonstrate the point, while ignoring the total bill simply does not help buyers. The article provides an unrealistic assessment for people living in Orange County NY. The following is a more realistic overview based on real purchases in the area:
Origination, inspection, appraisal: $1,847 (*giving them the benefit of doubt!)
Taxes: The average property tax bill for homes sold in July 2015 in Monroe, NY was $11,459. One of the buyer costs at closing are prorated taxes, so depending upon what time of year a buyer closes, they could owe up to the entire year's tax amount.
Interest charges: The article did not include mortgage interest in their estimate, so I am assuming they were not included. Depending upon when during the month the closing occurs, the buyer may need to pay mortgage interest charges in advance. Based on a real example, I'm going to use $550 as an estimate.
Mortgage Insurance: Depending upon the type of loan and the amount of downpayment, mortgage insurance payment may be required. Since many borrowers put down less than 20%, this is often a significant closing cost. A recent buyer had fees in this category of $4475.
Homeowners Insurance: Another required insurance that adds to the total bill as well. This is prorated so a $1000 annual insurance bill might require a $300 payment at closing.
Title Fees: Buyers in our area usually pay for the title insurance and fees. This could be another $3,000.
Recording fees: These are fees to record the sale with the county/town. I've seen $350 charged for this fee.
Other fees: There could also be charges for flood certification, surveys, courier fees and other miscellaneous expenses.
Add it up: In order to purchase a home in the Orange County NY area, a buyer could need much more than the ~$5,000 listed in the above mentioned article. In fact, depending on the house being purchased, the terms, and mortgage being used, a buyer could need upwards of $15-20,000 for a closing.
Do not be afraid! This is not an post that is intended to scare buyers away from purchasing! Every home purchase is different and the above is just one example. What I do agree with is that there are many different mortgage products available, and a home buyer should meet with a mortgage professional before home searching to find the best product for them. And if a buyer does not have money for both the down payment required for their mortgage product and the full closing costs, there are other options that might be available to them, such as a seller concession. So my suggestion to future home buyers is to save as much money as you possibly can, so you will be able to handle the down payment, closing costs, and still have some money for life. Then meet with an excellent mortgage professional to get preapproved, and then call me to look for the right home!
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