How much are mortgage closing costs? The answer depends on where you live, and on your choice of mortgages. This year's Bankrate.com Mortgage Closing Cost Survey uncovers some interesting trends.
It's not just mortgage rates that are lower since January of this year. Closing costs are, too.
According to the annual Mortgage Closing Cost Survey from Bankrate.com, the average mortgage applicant paid seven percent fewer closing costs in 2012 as compared to 2011. "Closing costs" are fees paid in conjunction with a mortgage that would not be payable if the home was financed with cash.
The seven percent decrease is notable because in the year prior closing costs had climbed 37 percent, on average, as banks adjusted to new layers of federal regulation. This year's reduction implies that lenders are starting to streamline new loan processes and costs.
The Bankrate.com survey assumes a purchase-money transaction with a loan size of $200,000 and a FICO score of 740 or better. It encompasses all loan types including FHA mortgages, VA loans, USDA loans, and loans via Fannie Mae or Freddie Mac.
Jumbo loans are excluded from the survey because jumbo loans exceed the survey's $200,000 loan size benchmark. Jumbo loans are loans which exceed $417,000 in most U.S. cities; or, $625,500 in certain "high-cost" areas including Los Angeles, California; Montgomery County, Maryland; and most of Hawaii.
In real estate, everything is local. The same is true for closing costs. In some states, mortgage closing costs are high. In other states, mortgage closing costs are low. And, often, the difference in mortgage closing costs is not a function of your lender -- it's a function of your state.
For example, some states, such as Florida, tax all mortgage transactions. Other states, such as Illinois, do not. As a result, mortgage closing costs in Florida tend to be more costly than mortgage closing costs in Illinois.
The five states in which mortgage closing costs are highest in 2012 are :
This means that the average mortgage borrower in New York state -- from Manhattan to Buffalo -- pays 2.71% of their respective loan sizes as closing costs.
The five states in which mortgage closing costs are lowest in 2012 are :
Nationwide, mortgage applicant pay $3,754 in closing costs, on average -- 1.88% of the amount borrowed. Notably, this is higher than the widely-cited Rule of Thumb that states "closing costs should be 1.50 percent of your loan size". All 50 states require costs over 1.50 percent.
If paying $3,754 in mortgage closing costs seems high, the good news is that you can elect to have your costs waived.
Many mortgage lenders offer low-closing cost and zero-closing cost mortgage options. With both programs, mortgage lenders agree to pay closing costs on your behalf in exchange for passing you a slightly higher mortgage rate that for which you'd otherwise be approved.
As a real-life example, if you live in The Woodlands, Texas and are borrowing $200,000, the Bankrate.com survey says that you should expect to see $4,619 in closing costs on your mortgage.
For purposes of our illustration, let's assume that the 30-year fixed rate mortgage rate is 4.000%. At 4.000 percent, your monthly mortgage payment would be $955. You'll pay full costs for that rate.
However, you also have the choice of taking a 4.250% rate instead. At the higher rate, your closing costs are waived in full. Your payment rises to $984, and now there's a choice to make :
Which choice is better? For many people, it's the higher rate with lower fees. Closing costs can be a killer -- taking a zero-closing cost mortgage changes that dynamic and changes the math -- especially in a falling mortgage rate environment.
There's very little reason to pay big closing costs when mortgage rates are expected to fall in the future. It's wasted money and, depending on in which state you live, it can be a lot of wasted money.
Whether you're looking at a purchase money mortgage -- FHA, VA, USDA or conforming -- or considering a refinance of your existing home loan, make sure to ask your bank about low- and zero-closing cost mortgage options.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2015 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)