CNN
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High interest rates and more expensive listings have made buying a new home even more difficult. But there’s one often overlooked expense when buying a home: closing costs.
These costs, which are the fees due on the day the home purchase is finalized, have increased in recent years. In 2022, the average cost of a loan paid by home buyers – including origination fees, appraisal and credit report fees, title insurance, discount points and other fees – was $6,000, a nearly 22% increase from 2021, according to a report from the Consumer Financial Protection Bureau.
But the calculation of closing costs could soon change: A recent settlement from the National Association of Realtors, set to take effect in July, could potentially increase these costs for some homebuyers. At the same time, the Biden administration plans to target so-called “junk fees” hidden in closing costs. In a recent report, the CFPB said it would work to “analyze mortgage foreclosure costs, seek public input, and, if necessary, issue rules and guidance to improve competition, choice, and affordability.”
Here’s what you should know about closing costs:
Not every buyer pays the same amount in closing costs. Your final bill depends on several factors, including the state you live in, taxes, the type of mortgage loan you take out and the overall cost of the home you are buying.
Closing costs may include an application fee to process your loan application, home appraisal fees that determine how much the property is worth, a credit report fee, title insurance (which protects the buyer from defective property titles), and an origination fee (the price you pay for getting the loan in the first place).
Some states require an attorney at closing, which increases the overall bill.
Some lenders include closing costs in the total mortgage, increasing payments over time.
New York, Delaware and Washington, D.C., have the highest average closing costs, according to Bankrate; while Missouri, Indiana and North Dakota have the lowest.
“They can typically represent 3% to 4% of the loan amount,” Jeff Ostrowski, who covers housing at Bankrate, said about closing costs across the country. “So if you’re borrowing $400,000, you’re talking about an extra $12,000 to $15,000.”
Ostrowski said that while existing homebuyers already know the drill when it comes to closing costs, some first-time homebuyers may forget to take them into consideration when saving for a home.
“For first-time buyers who are really struggling to qualify, this might be something to worry about,” Ostrowski said. “Generally, the loan officer you work with knows this and will take it into consideration in their approval process.”
Historically, homebuyers have not had to pay real estate agent fees themselves. However, last month a federal judge gave the green light to the NAR deal, paving the way for potential changes to the current real estate business model.
Under the terms of the agreement, sellers’ agents will no longer be required to offer commissions to buyers’ agents. This means homebuyers may have to pay the realtor’s commission themselves, increasing the overall cost at closing.
Brian Connolly, assistant professor of business law at the University of Michigan, said it’s too early to predict how the NAR deal might affect closing costs.
“It’s not so clear what will happen to broker commissions after the NAR agreement goes into effect this summer,” Connolly said, predicting that the status quo could remain even after the agreement goes into effect. “At least initially, we will likely see the percentage commission system continue.”
As part of the Biden administration’s broader effort to crack down on junk fees, the CFPB said it was looking for ways to reduce costs for homebuyers.
Closing costs are “often rife with unwanted fees,” the agency said.
Fees for credit reports were one example given by the CFPB. Homebuyers pay a fee to have mortgage lenders pull their credit reports from the three major credit reporting companies: Equifax, TransUnion and Experian. These costs have recently increased by 25% or even 400%, according to the CFPB. (Consumers can check their credit score for free every 12 months at AnnualCreditReport.com).
“These sharp increases in a market lacking competition and choice warrant further examination,” the report states.
While it’s a good start, combating undue fees doesn’t get to the heart of the housing affordability crisis, Connolly said.
“The fact that we are heavily undersupplied in housing, that we are dealing with labor shortages in home construction, and that we are dealing with continued high prices for raw materials – these are the biggest structural problems in the market and it seems like this is just sidestepping a much bigger problem,” he said.
There’s a relatively simple way to reduce your overall closing costs: shop around.
According to Freddie Mac, a significant percentage of people don’t compare rates from multiple lenders, even though doing so can save homebuyers thousands of dollars. For example, by the end of 2022, borrowers could save up to $600 annually by getting one additional rate quote and an average of more than $1,200 annually by getting at least four rate quotes, according to data compiled by Freddie Mac.
“Borrowers who received up to five rate quotes during the second half of 2022 could have potentially saved more than $6,000 over the life of the loan, assuming the loan remained active for at least five years,” Genaro Villa, economist at Freddie Mac said in a statement.
And even if more than one lender lowers your credit score, it won’t hurt your credit as long as it’s done within a 45-day period, according to the CFPB.
“You should get at least three mortgage offers,” Ostrowski said. “When comparing these offers, look not only at the rate itself, but also the closing costs. There may be some variation, and if it is significant, you would obviously want to choose the lender that offers you the best deal.”
