Thursday, October 29, 2009

Are Closing Costs 2.5%, 3%, 3.5%, 4%?

How much are the closing costs for a purchase transaction? 2.5%, 3%, 3.5%, 4%? We get asked this question all the time, and here's why we can't answer it without actually preparing a Good Faith Estimate.

Many of the closing costs are fixed costs, meaning they are the same regardless of how big the loan is. Some examples of fixed closing costs are:
• Appraisal fee
• Credit report
• Underwriting fee
• Tax Certificate
• Loan closing fee
• Real estate closing fee
• Title insurance fees
• Recording fees

Other closing costs change depending on the size of the loan or the purchase price. Here are some examples of closing costs that change:
• Origination fee (usually 1% of the loan amount)
• State tax stamps

Still other closing costs depend on the individual property, the interest rate, the borrower's credit, or the closing date. Here are some examples:
• Property taxes (depends on the property and the date of closing)
Homeowner's insurance (depends on the property and the borrower's credit score)
Pre-paid interest (depends on the borrower's credit score - which determines the interest rate, the loan amount, and the date of closing)

Let's assume a property sells for $100,000 and the fixed costs are $2,000. The variable costs will probably be low because the taxes and insurance will be low. Let's assume the variable costs total $2,500. Total costs would be $4,500, or 4.5% of the purchase price.

Now let's assume we have a property selling for $500,000. The fixed costs would be the same - $2,000. The variable costs would be higher because the loan amount, the taxes, and the insurance would be higher. They might be $8,000. The total would be $10,000, which is only 2.0% of the purchase price.

Even though the closing costs are $5,500 less for the cheaper house, they are 2 1/4 times the percentage of the costs for the more expensive house - 4.5% versus 2.0%.

It's always a good idea to have your lender (preferably us) tell you how much the closing costs are. Guessing based on a "rule of thumb" is a very bad way to do it.

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