As Closing Costs Rise, Here's How to Knock Them Down
It's not just home prices that are on the rise, closing costs have also been inching up recently. A new report by Bankrate.com shows mortgage closing costs increased 6 percent over the past year to an average of $2,539 on a $200,000 loan. Origination fees increased 9 percent to $1,877 and third-party fees increased 1 percent to $662.
"Lenders say closing costs have increased because they have faced higher costs to comply with new mortgage regulations that went into effect earlier this year," says Polyana da Costa, senior mortgage reporter at Bankrate.com. "It takes longer to underwrite a loan these days and compliance%VIRTUAL-pullquote-"There will always be closing costs because the lender will always get paid."% comes at a cost, so they say they are spending more on staffing and technology to make sure they comply with the rules."
In the years leading up to the 2008 housing crash, getting a mortgage was pretty easy with some lenders slacking on documentation requirements and offering zero-down loans. Now, new regulations and tighter lending standards designed to protect consumers and lenders make the process much arduous -- and costlier to lenders.
Closing costs vary by state. According to the Bankrate.com survey, which surveyed up to 10 lenders in all 50 states and Washington, D.C., in June, Texas has the highest closing costs coming in on average at $3,046 for a $200,000 loan. Alaska at $2,897, New York at $2,892, Hawaii at $2,808 and Wisconsin at $2,706 rounded out the top five.
Closing costs are unavoidable, which is why experts caution to be leery of anyone promising no costs. "There will always be closing costs because the lender will always get paid," says Erin Lantz, vice president of mortgages at Zillow.com. "They just may come in the form of a higher rate, or an inflated price on a new home purchase if lending through the builder's preferred lender or a higher loan balance."
While there's no escaping closing costs, there are ways to reduce them. According to da Costa at Bankrate.com, one of the best ways to save on closing costs is to shop around and to look beyond interest rates when comparing mortgages.
She adds not to be afraid of negotiating the fees with lenders when doing comparisons. "There's usually not much you can do about third-party fees, but origination fees, which are the fees paid directly to the lender, are negotiable, especially when lenders are trying to compete for your business," she says. Da Costa recommends getting at least three estimates from lenders that details%VIRTUAL-pullquote-For those refinancing ... closing costs can be rolled into the loan balance.% all fees to do a fair comparison. If an estimate seems too high, ask the lender why.
In addition to negotiating the fees, experts say buyers can choose how to pay those costs. According to Lantz, borrowers can pay more at closing and get a lower interest rate or pay less at closing and get a higher interest rate.
Lantz says buyers can also negotiate to have the seller to cover many of the closing costs. This is easier to accomplish in a buyers' market, but could be hard to achieve in some parts of the country.
For those refinancing, Lantz says, closing costs can be rolled into the loan balance. Keep in mind that means paying interest on the closing costs as well as the loan amount.
"You should be prepared to bring a little bit of money to the table, but you can avoid nearly all of them if you're willing to accept a higher rate in exchange for paying fewer costs up front," says Lantz. "If potential homebuyers are concerned that they will not be able to bring any money to the table, they may want to think further about if now is the right time to buy -- financially speaking."