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Rising interest rates and soaring property prices are making it more difficult to buy a new home. However, there is one expense that is often overlooked when purchasing a home: closing costs.
These costs, or the fees you pay on the day you complete your home purchase, have increased in recent years. In 2022, the median loan cost (including origination fees, appraisal and credit report fees, title insurance, discount points, and other fees) paid by homebuyers is: That's an increase of nearly 22% from 2021 to $6,000, according to a report from the Consumer Financial Protection Bureau.
However, the calculation of closing costs may soon change. A recent settlement by the National Association of Realtors, scheduled to take effect in July, could increase closing costs for some homebuyers. At the same time, the Biden administration plans to take aim at so-called “junk fees” hidden in closing costs. In a recent report, the CFPB said it would “analyze mortgage closing costs, seek public input, and, where appropriate, issue rules and guidance to improve competition, choice, and affordability.” He said he would work on it.
Here's what you need to know about closing costs.
Not all buyers pay the same amount in closing costs. Your final bill will depend on several factors, including the state you live in, your taxes, the type of mortgage you take out, and the total cost of the home you purchase.
Closing costs include an application fee to process your loan request, a home appraisal fee to determine the value of the property, a credit report fee, title insurance (which protects the buyer against defects in the title of the property), and origination fees (which protect the buyer against defects in the property title). (protecting the buyer against defects in title). Pay to get the loan first).
Some states require an attorney at closing, which increases your overall bill.
Some lenders roll closing costs into your total mortgage loan, increasing your payments over time.
According to Bankrate, the highest average closing costs are in New York, Delaware, and Washington, DC. Meanwhile, Missouri, Indiana, and North Dakota have the lowest rates.
“Typically, that amount will be 3% to 4% of the loan amount,” says Jeff Ostrowski. .Those who cover homes at Bankrate talked about closing costs nationwide. “So if you owe $400,000, that's an additional $12,000 to $15,000.”
Ostrovsky said that while existing homebuyers already know how to calculate closing costs, some first-time homebuyers forget to factor them in when saving for a home. He said it was possible.
“For first-time buyers who are working hard to qualify, that may be a concern,” Ostrovsky said. “Typically, the loan officer you work with will know that and will factor that into your approval process.”
Historically, homebuyers didn't have to pay real estate agent fees themselves. But last month, a federal judge gave the green light to the NAR settlement, paving the way for potential changes to the current real estate business model.
Under the terms of the settlement, the seller's agent will no longer be required to offer commissions to the buyer's agent. This means homebuyers may have to pay real estate agent fees themselves, which can increase the total costs at closing.
Brian Connolly, an assistant professor of commercial law at the University of Michigan, said it's too early to predict how the NAR settlement will affect closing costs.
“It is less clear what will happen to broker fees after the NAR settlement takes effect this summer,” Connolly said, predicting that the status quo may remain even after the settlement takes effect. “The percentage fee system is likely to continue, at least initially.”
As part of the Biden administration's broader effort to crack down on junk fees, the CFPB said it is looking at ways to reduce costs for homebuyers.
The department said closing costs are “too often filled with junk fees.”
Credit report fees are one example cited by the CFPB. A homebuyer pays a fee to the mortgage lender to obtain his credit report from three major credit reporting companies: Equifax, TransUnion, and Experian. These costs have recently skyrocketed by 25% and up to 400%, according to the CFPB. (A consumer can check his credit score for free every 12 months at AnnualCreditReport.com).
“This rapid increase in a market with no competition or choice requires further scrutiny,” the report said.
Mr Connolly said that while a good start, tackling junk fees would not get to the heart of the house price crisis.
“The fact that we are in massive short supply of housing, we are dealing with labor shortages in housing construction, we are dealing with persistently high raw material prices, these are larger structural issues in the market, and this is just a workaround for a bigger problem,” he said.
There is one relatively simple way to lower your overall closing costs. That's something to consider.
Freddie Mac says a significant percentage of homebuyers don't compare interest rates from multiple lenders, despite potentially saving them thousands of dollars. For example, data compiled by Freddie Mac shows that in the second half of 2022, borrowers can earn up to $600 a year by getting one additional interest rate quote and an average of $1,200 a year by getting at least four interest rate quotes. It is possible to save more than that.
“A borrower who received as many as five interest rate quotes in the second half of 2022 could have saved more than $6,000 over the life of the loan, assuming the loan lasts at least five years,” said Freddie Mac economist Genaro Villa. There is,” he said. said in a statement.
Additionally, the CFPB says that even if multiple financial institutions obtain your credit score, your credit will not be harmed as long as it is done within 45 days.
“You need to receive at least three mortgage offers,” Ostrovsky says. “When comparing these offers, consider not only the rates themselves, but also the closing costs. There can be some variation, but if there is a large variation, you should consider the lender who offers you the most favorable terms. It's obvious that you would choose.”
