You Can Save Money by Understanding the Fees and Costs When Buying and Selling Real Estate
Pay attention to closing costs, junk fees, and others fees to save money when you close on real estate
Between the showings, inspections, and paperwork, it's easy to lose sight of how much you are paying for various things when buying and selling real estate. Most expenses are lumped into closing costs, which is what you pay at the end of the process to complete the transaction. You can save a lot of money if you pay attention to closing costs and understand exactly where your money is going.
What Are Closing Costs?
The term "closing costs" refers to the total cost of several dozen possible expenses related to buying and selling real estate that are paid at closing, the meeting where final signatures and final payments are obtained. These expenses, in turn, can be classified either as recurring or nonrecurring.
Recurring Closing Costs
Recurring closing costs include real estate taxes, homeowners' insurance, and private mortgage insurance. This type of cost is paid not just at the time of closing, but every month thereafter. They may have to be paid in advance at the time of purchase, a process also known as putting the funds in escrow. This is done by depositing the funds into an account so they will be available to cover future expenses. It could also be necessary to pay interest in advance to cover the first several days or weeks in your new home depending upon your closing date.
Nonrecurring Closing Costs
Nonrecurring closing costs are also paid at the time of closing. They can include:
- An application fee (lender profit)
- A series of loan fees (e.g. an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, etc.)
- A service fee for the broker, if a broker is being used
- Any home inspections required by the lender (e.g. pest inspections, radon inspection)
- An appraisal required by the lender (meaning a third party is paid to verify that the property is worth at least as much as the selling price)
- Federal Housing Administration (FHA) fees
- Veteran's Administration (VA) fees
- Rural Housing Service (RHS) fees that are related to mortgages that the government guarantees
- A land survey for verification of the boundaries of the property
- Title changes (e.g. a settlement fee, title search, title examination, closing service letter, deed preparation, notary fees, attorney's fees and title insurance)
- Courier/Delivery fees
- Recording fees
- Transfer taxes
- Home warranty
How Much Do Closing Costs Actually Cost?
You can usually expect to spend 3-5 percent of the property price on closing costs. The amount of closing fees varies according to the lender, location of the property, and price of the home. The following are some of the general guidelines provided by the Federal Reserve Board regarding some of the most common fees:
- Application Fee: $75-$300, including a credit report for each applicant
- Loan Origination Fee: 1-1.5 percent of the loan amount
- Points: 0-3 percent of the loan amount
- Appraisal Fee: $300-$700
- Home Inspection Required by Lender: $175-$350
- Prepaid Interest: Varies according to amount of the loan, interest rate, and number of days to be paid; $300-$750 is not unusual
- Private Mortgage Insurance: 1.5 percent or less of the loan amount to prepay the first year
- FHA, VA, or RHS Fees: 1.5 percent, 1.25-2.0 percent, or 1.75 percent
- Homeowners' Insurance: $300-$1,000 per year depending on the price of the home
- Flood Determination Fee: $15-$50
- Survey: $150-$400
Beware of "Junk Fees" Added to The Closing Costs
Most mortgages include "junk fees" or "garbage fees" and, while they cannot be avoided altogether, they may be minimized. If you are purchasing real estate, you should watch out for excessive processing and documentation fees in the following areas:
- Application fee
- Underwriting fee
- Mortgage rate lock fee
- Loan processing fee
- Broker rebate
These fees are often subject to negotiation, so if any seems oddly high, ask about it. This principle applies to all fees, in fact, as just the act of questioning the fee will often result in the fee being lowered or even eliminated altogether. In any case, you should always try to negotiate fees and shop around between various lenders for the best costs. You might even be able to save some money by using another lender with significantly lower fees and paying points to lower your rate.
All-In-One Pricing of real Estate Closing Costs
There are some lenders that offer so-called "all-in-one" flat-rate fees that encompass all closing costs in order to streamline the process as much as possible for consumers. "All-in-one" is a term that can also be used when describing other mortgage products as well, so it is necessary to be cautious when shopping for such products. Be sure to buy the one that applies only to closing costs for the mortgage, not other banking relationships or products. You don't want to sign up for something you don't want.
Ask the seller to chip in
You might be able to request that the seller pay closing costs if the market in your area is currently favoring the buyer, but don't necessarily count on it. If the seller won't pay closing costs, ask the seller to chip in something in order to close the deal. The seller may be willing to pay a few hundred dollars if it means the difference between selling the property or putting it back on the market. If the seller won't pay closing costs, compare an all-in-one mortgage to paying closing costs individually.
Comparison shopping can save thousands
You should look into comparison shopping, which will allow you to become more comfortable with the whole process while also getting a good idea of the costs from various sources. Try requesting good faith estimates from half a dozen lenders and then compare the results. Once a lender is chosen, be sure to save the good faith estimate. You can also ask your preferred lender to match the terms in a good faith estimate from another lender, a process that almost always works. The lenders who are trying to get your business will more than likely be selling your loan on the open market after closing anyway.
Minimizing Anxiety and Expense
The HUD-1 form is the official form listing all closing costs. This form should be given to you at least 24 hours before closing. Compare it to the good faith estimate. If the figures don't match, ask questions. Don't be afraid to delay closing if something doesn't look right or if the figures you were promised are significantly different.