Closing Costs & Buying Down Points
Posted October 3, 2022 in Real Estate Trends
Schools back in session and fall is coming fast! It is a different market, so let’s hash out closing costs again. Let’s start with the fun facts first…
Every buyer has fees to get into a home.
You need earnest money. This shows the seller you are a serious buyer. Earnest money will be deposited to the title company. When you close, your earnest money goes toward your down payment, or your closing costs, and sometimes (only sometimes) you can actually get your earnest money back after closing. If you do not close, and if you back out WITHOUT a legal reason, then the seller has a right to all, or part, of your earnest money.
You need money for inspections. Home inspections, sewer scope inspections, you can do a radon test and a well test, depending on the property you want to purchase. Inspections are done by 3rd parties, and they will want to be paid for their time and expertise to come out and perform the inspections. These are out of pocket funds you need upfront.
You need to pay for the appraiser. Remember that the inspections are for YOUR information. The appraiser is for the bank’s information. The bank wants to make sure it isn’t lending you more than the house is worth, just in case you don’t pay your mortgage and they end up taking the house back. The bank will only lend you either the purchase price OR the appraisal amount… WHICHEVER IS LESS.
You need a down payment. This is the amount required for the buyer to bring in depending upon the loan the buyer is using. Every loan has different requirements. FHA – 3.5% of the purchase price. Conventional – 5% of the purchase price. USDA (Rural Development aka RD) – 0% (This is a 100% loan, but there are some locations/home requirements on this one).
Down payment assistance – 0%. This is a 2nd loan with higher fees. This loan program assists buyers with the down payment requirement on their loan. It is a GREAT program especially for folks who have some money, but not enough for a down payment.
Most people are aware of the down payment portion, but they forget about closing costs. There are 28 people involved in the purchase & sale of a home, and because no one pays anyone for our good looks or sparkling conversations, every one of those 28 people want to be paid.
Every buyer will have a different amount of closing costs depending on their loan, how much their lender origination fee is, if there are any lender ‘junk’ fees, etc. For buyers, the majority of their closing costs are going to be for the amount they are being charged for their loan. Closing costs are to pay for everyone who touches their file to help them get the loan to buy the home, and for the buyers portion of costs for the legal transfer of the homes ownership.
When the government was buying down interest rates, rates were in the 2%-4%, closing costs were about 2%-2.5% of the purchase price of the home. However, the government has stopped buying down rates. Closing costs for many buyers will be higher now than before because your lender wants to use some, if not all, of those costs to ‘Buy Down the Rate’. These are called Points. Each point is about 1% of the purchase price.
We have a client buying a home at $450,000. They are buying down the rate to 5%, but it is going to cost them an additional $9,000 in closing costs to get the lower rate. At $450,000, we got the seller to ‘pay up to 2.5% of the closing costs’, and this sounds great. However, the seller never actually pays your closing costs. WHAT?! Yes, you read that correctly, but let me explain…
Purchase Price $450,000 (the amount your loan is based of of minus your down payment).
Closing Costs $11,250 (these are contributed by the seller off of their net).
Seller net $438,750.
Seller paid closing costs means that the sellers are agreeing to a lesser net so that the buyer CAN FINANCE their closing costs into their loan. The seller does not actually pay your closing costs. The sellers are agreeing to net a lesser amount than the purchase price so that the buyer can finance those costs into their loan. The last couple of years of multiple offers and bidding wars above & beyond the listing price are pretty much behind us. The bright side of rising rates is that buyers can get into a home without offering 20k over purchase price. Sellers are also willing to negotiate closing costs as part of the purchase/sale contract that the buyers can use to cover their closing costs or to buy down points for a lower interest rate.
Our current market is a more balanced market which helps both buyers and sellers. We’ve had a lot of new Realtors jump in the market the previous couple of years, and they’ve never seen or experienced a changing market like this. Many Realtors are still pricing homes based off of home sale prices from earlier this year, and that isn’t accurate. Realtors need to look at what homes are going pending at. What is the percentage of price drops? What is the average time on the market? (no more fast weekend sales!) From about May of this year to current, home prices have gone down on an average of about 10%.
It’s not all gloom & doom though. A balanced market is better for everyone. ere are pros for sellers as well, as most of them want to buy a home. Other sellers are looking at, and accepting, contingent offers again! Sometimes we can project out what we think the market is going to do, and sometimes we really can’t. is current market is so volatile that we are on a quarter by quarter basis. It’s like petting a kitten who wants you to rub its belly… do you, or don’t you?