Ever been a victim of sticker-shock? Far too often I hear stories of unassuming folks getting to the closing table only to find that they need MORE money than they thought….like thousands of dollars more than they thought. How does this happen??
Some lenders aren’t lying; they’re just ‘misleading’
Call it what you want, in my book misleading is the same as not telling the whole truth which is the same as being dishonest which is, well, the same as lying! Call 10 different lenders, ask them what closing costs are and you’ll most likely get 10 different answers. WHY? Misleading, that’s the short of it.
There’s closing costs and then there’s the cost of closing
Ask a lender what closing costs are and most will tell you exactly that…..they’ll tell you what their closing costs are, and they’ll leave it at that. Most true lender closing costs range from $1000 – $2000. This will include things like processing, underwriting, credit report, funding, attorney, and other ‘lender’ related fees. That’s fine and all BUT what they’re not telling you is that there is MORE to the story. There are other ‘third party’ vendors such as the title company, the appraisal company, and the government, to name a few, that inevitably have fees associated with the processing and closing of a mortgage home loan, not to mention your pre-paids & reserves (what??).
So what makes up the total ‘cash-to-close’?
There are 3 components that factor in to your total cash due at closing. Let’s dissect these:
- Down Payment – this ranges from 3.5% to more than 20% of the purchase price depending on loan type. There are some loan types, such as VA & USDA, that do not require any down payment (email email@example.com for more info on those types)
- Closing Costs – these are the ‘one-time’ closing costs incurred at closing. Closing costs may include following:
- Mortgage Company fees
- Title Company fees
- Appraiser fees
- Government recording fees
- HOA fees (if applicable)
- Discount points (if applicable)
- Pre-paids AND Reserves – these are your property taxes, insurance, and daily interest collected at closing. This component, depending on the state your property is located in, may be just as much if not MORE than the closing costs (component #2, above). They may include the following:
a. 3-5 months of Property Taxes
i. If closing on your home loan during Jan – Sept a lender will typically collect 3 months
ii. If closing on your home loan during Oct – Dec a lender will typically collect 4-5 months (email firstname.lastname@example.org for further explanation)
iii. If closing on a refinance transaction this can range anywhere from 3-15 months (email email@example.com for further explanation)
b. 15 months of homeowner’s insurance
i. 1 full year is paid up front, the day you close
ii. Additional 3 months is collected and placed into your escrow account
iii. If closing on a refinance transaction your current policy’s renewal date will determine how many months are collected
c. Per Diem (or daily) interest – lenders will collect daily interest from the day you close through the end of the month. For example – if you closed on Jan 15th then the lender would collect daily interest from the 15th through the 31st (17 days of interest).
As you can see, there is a BIG difference in ‘closing costs’ and the ‘cost of closing’. When you ask your lender what their closing costs are and they say “around $1500”, your very next question should be ‘thank you, now what do you estimate my total cash-to-close to be? PLEASE make your lender paint you a true picture of what that looks like. You’ll be set for success!
I’m curious, what’s the largest disparity you’ve seen from a lender’s initial estimate to the real cash-to-close amount on the day of closing? Please share your story with me @ firstname.lastname@example.org I’d love to hear from you!