Getting a mortgage doesn’t just mean putting money on the table for a down payment. It also means paying closing costs.
Closing costs are the various fees that mortgage lenders charge to finalize a home loan, and they apply to new mortgages as well as refinanced loans. Closing costs can vary by lender and are intended to cover costs such as title insurance, registration fees, and other administrative aspects of getting a loan. This year, closing costs have become more expensive for borrowers.
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Closing costs jumped
In the first half of 2021, the average closing costs for a mortgage on a single-family home (including prepaid property taxes) were $ 6,837, according to ClosingCorp, a real estate closing data provider. This represents an increase of 12.3% over the previous year. Excluding prepaid property taxes, closing costs averaged $ 3,836, which represents a 10.5% year-over-year increase.
Obviously, property taxes have caused a greater increase in closing costs. The reason? Property taxes are calculated by taking the assessed value of a home and multiplying it by its local tax rate. As home values rise, property taxes tend to follow (although they can also rise during times when homes are losing value). With home values rising nationally, it’s easy to see why property taxes have gone up and why closing costs are higher as a result.
How borrowers can deal with higher closing costs
Whether you’re buying a home or refinancing a mortgage, closing costs are inevitable. But there are steps you can take to make yours more manageable.
First of all, know that you usually don’t have to pay your closing costs up front. If finding that extra cash at closing is a challenge, you can almost always arrange to have your closing costs built into your mortgage so you can pay them back over time. Be aware that in doing so, you will then be paying interest on your closing costs. But in the context of what could be a loan of several hundred thousand dollars, that might not exactly be a deciding factor.
Another thing you should know is that some closing costs are negotiable, so it’s worth asking your lender if there is any wiggle room.
Property taxes are a component of closing costs that are not negotiable. Lenders do not determine property taxes; they are imposed by the municipalities, and lenders are obligated to ensure that they are prepaid in connection with the granting of home loans. Likewise, the registration fees to register a mortgage on the public record are not set by lenders and generally cannot be negotiated.
But the loan origination and application fees are dictated directly by the lenders. A lender who wants to earn your business may agree to take care of it. Plus, when you buy a home, your closing costs usually include a home appraisal fee. Some lenders will let you get your own appraisal, and if you can find a more affordable one, you can save money as well.
For the most part, however, it’s a good idea to assume that your closing costs will total between 2% and 5% of the purchase price or value of your home. It is wise to determine how you will manage these fees before it comes time to finalize your loan. If you build them into your mortgage, you won’t have to shell out the money up front. If you intend to pay them off when you close, be sure to budget accordingly.