Most weeks, I glance through the Sunday newspaper just to see what the “mainstream media” is talking about. This past Sunday the Indianapolis Star (courtesy of USA Today) carried an article titled, “Closing Costs Are a Mystery to Millennials.” Based on my experience in the real world, I’d agree and extend that to most everyone else too. The article was right though, as most first time home buyers have no idea that they not only have to come up with enough cash for a down payment, but for closing costs as well.
When most first time buyers think of closing costs, they think in hundreds, when in fact, closing costs typically run more like $4000 on the average deal. These costs are tightly regulated. (If health care costs were this tightly regulated, your health insurance premium would be about a quarter of what they are now.) Because they are tightly regulated there isn’t a great deal of difference from one lender to another. The costs tend to run in a fairly narrow range. Many of the costs are fixed, meaning they don’t change much from one deal to another. A cost for an appraisal, title search, credit report, county recording fees, etc. doesn’t change whether someone is buying a $50,000 house or a $400,000 house. And most of the variable costs aren’t determined by the lender you choose- think homeowners insurance, title insurance, real estate taxes, PMI, and homeowners association dues. All of these costs are determined by some entity other than your lender (and aren’t affected by your choice of lender either).
Because of the variable costs, closing costs do go up as the price of a home goes up. But, even the least expensive of homes is going to have closing costs running in excess of $3000. And the average priced house is likely to have net closing costs in the $4-5,000 range. Buyers need to plan accordingly. Now, there is one strategy that can come to the rescue of buyers with just enough cash for a down payment, and that is to negotiate to have the seller pay the buyer’s closing costs. There are some pro’s and con’s to this strategy, and they depend on one’s unique individual situation. This is something that I review with buyers as they put their home buying plan together. Let’s talk and be sure to take the mystery out of closing costs!