July 2014 Blogs
Calculating closing costs:
One of the most confusing things about the process of closing on a home is the variety of closing costs. The costs can include points, financing costs, title insurance and taxes.
These costs can vary across the U.S., can vary by lender, and can also be higher if a buyer's credit rating is low. But, as a rule of thumb, estimate that your costs will be anywhere between 3% and 6% of the price of your home, according to the Federal Reserve Board. As a buyer, it pays to shop around for lenders who offer the lowest closing costs. The FRB offers a very detailed list of common closing costs and their estimated prices.
How can you calculate what your closing costs will be? Follow these steps:
1. Review your lenders' good faith estimates. Federal law mandates that lenders provide mortgage shoppers with what's called a "good faith estimate" of settlement fees, or closing costs, that a lender will charge you upon the closing of your home. Good faith estimates -- which include estimations of the mortgage-related closing costs your lender will charge you -- are available to you early in the process, when you are shopping for a mortgage.
Get good faith estimates from two to three lenders and compare their costs. There will be a laundry list of fees noted on these good faith estimates, among them: the loan origination fee, loan application fee, "buydown" points, appraisal fee, survey, title search and title insurance...the list goes on.
Ask about any fees that seem unnecessary -- these may be "junk" fees that can be easily eliminated if you ask your lender.
Using these good faith estimates, try to negotiate lower fees with your preferred lender and ask lenders to meet or best other lenders' offers. Do this comparison shopping before signing for a loan.
2. Research. There are several places you can go online to estimate what your closing costs may be. On Trulia, try the SmartClosing Calculator for a calculation of what your closing costs may be by entering in variables like the home's address and your loan details.
FreddieMac.com also offers a closing costs calculator, as well as a closing costs worksheet.
3. Compare. At the closing of your home purchase, you will be required to sign a Final Settlement Statement, also known as a HUD-1.
This statement will list the closing costs and fees that will be charged to you, the buyer. By law, you can ask to receive a copy of this statement and view it at least one day before closing.
Be sure to review the list ahead of time, checking that everything is correct. This statement will give you a true picture of your closing costs (and is a better statement of your closing costs than the estimations that were provided in the good faith estimate from your lender.)
Compare the costs on your good faith estimate to those on your final settlement statement -- the fees listed on the settlement statement should compare very closely to those on your good faith estimate.
For more on the settlement statement and federal requirements put into place to protect consumers, read "RESPA - Real Estate Settlement Procedures Act" at hud.gov, the website for the U.S. Department of Housing and Urban Development.