You finally found a house you like. You and the seller have agreed on a price, even though it was more than you hoped you would have to pay. You have signed a contract and set a settlement date.
So that's the end of your money worries, right?
Wrong.
To make that home yours, you will have to pay thousands of dollars more than the price you negotiated with the seller, usually about 3 to 5 percent of the sales price. That means that a $300,000 house will actually cost $309,000 to $315,000.
The additional money covers all kinds of closing costs, such as insurance payments, fees to the lender, fees to the jurisdiction where the property is located, and some prepaid charges that go into an escrow account. And you are expected to have it all with you on settlement day in the form of a certified check. Sorry, personal checks are not accepted.
A couple of recent real-life examples:
Dale Mattison, an associate broker with Long & Foster Real Estate Inc., recently sold a $1 million property in the District. The settlement charges totaled $36,181, or 3.6 percent, he said, looking at the settlement form. That form, called a HUD-1, was developed by the Housing and Urban Development Department; legally, it is supposed to be given to both the buyer and seller 24 hours before closing. In reality, many times buyers do not see it until they are already sitting at the settlement table.
Kathleen Herbert, a settlement lawyer and general counsel at MBH Settlement Group LC, looking at another HUD-1, said total settlement charges on a $382,000 property that recently changed hands at her Fairfax office came to $8,300, or 2.2 percent. Virginia tends to have the lowest settlement charges, compared with the District and Maryland, largely because of lower state transfer and recordation taxes and lower title insurance rates, settlement lawyers said. "However you want to cut it, you need a lot of money to close," Mattison said. "I've seen settlements delayed so that buyers can beg, borrow and steal the money they need."
And there is not much you can do about it -- precious few of these fees are optional.
The Greater Capital Area Association of Realtors, or GCAAR, divides closing costs into five basic categories -- loan-related fees, prepaid or escrow items, title charges, recordation and transfer charges, and additional settlement fees -- on a closing worksheet widely used by local agents. The agents use the GCAAR worksheet to show buyers the costs they will face at closing.
Loan-Related Fees
One of the largest fees related to getting a mortgage is the loan discount fee, also called points. Each point equals 1 percent of the loan amount. On a $300,000 mortgage, for example, the fee would be $3,000. Buyers pay points to reduce their interest rate.
"For many years, it was necessary to pay points to lower the interest rate for the purpose of qualifying for the loan," said Keith Gumbinger, a mortgage industry analyst at financial publisher HSH Associates.
In this period of low mortgage rates, though, few buyers are paying points on their loans, settlement lawyers say. Rates on 30-year fixed-rate mortgages averaged 5.98 percent with 0.7 points this week, up slightly from 5.94 percent last week, according to secondary mortgage giant Freddie Mac.
Consumers often confuse discount points with loan origination fees, which can be also called points, Gumbinger said. Loan origination fees are also often denominated as a percentage of the loan amount. "Even if the broker tells you your mortgage has no points, that doesn't mean it doesn't have loan origination fees," he said.
It is no wonder people get confused. Even the Internal Revenue Service calls both charges points; they are tax-deductible in many circumstances.
