It's called the settlement or closing, the last dance between a homebuyer and
seller, chaperoned by a settlement attorney. It's where the final transaction
occurs and a big chunk of money goes for "closing costs." Closing costs can
add up to several thousands of dollars to the actual price, on top of your
loan down payment. The first-time homebuyer needs know what those costs are
and where that money's coming from.
What can you expect to pay? That depends on where you live. Closing costs
vary from state-to-state and town-to-town. Maryland, for instance, had a
reputation for imposing some of the highest closing costs in the country,
mainly because buyers were required to put a whole year's worth of real
estate tax payments into escrow at closing time. Fortunately, this year the
Maryland legislature heard the "Ouch!" coming from first-time home buyers, and
cut that requirement in half to only six months of payments.
Your first step is to scrutinize the Good Faith Estimate of Closing Costs
your lender must provide before you sign. Take your time going over the
numbers, including settlement fee, title search, title insurance, document
preparation, etc. If you're smart, you'll question your lender about any
item that doesn't make sense.
The important thing to remember is that all of it's negotiable... to a point.
Lenders charge borrowers "Points," otherwise known as the loan origination
fee. This is the big-ticket item on your list of closing costs--one point is
equal to one percent of the total loan amount, or $1,500 on a $150,000 loan,
for example. Home buyers have two ways to get around paying points. First,
they can take out a loan with zero points. The catch with no-point loans is
you'll pay a higher interest rate. But if you plan to keep your home for
only a few years, it makes sense to give a little on the monthly interest
rate in order to avoid paying so much cash up-front.
Second, to make the costs easier to swallow, buyers frequently ask sellers to
contribute a "cash credit" toward closing costs at settlement. That applies
to points and most other items. But it's up to the seller to decide how much
they are willing to contribute. And remember that lenders also limit the
amount sellers may contribute toward the total transaction, in the
neighborhood of 3 - 6 percent of the sales price.
By Cliff McCreedy