Closing costs... explained: 3 tips for achieving best value

If homebuyers and refinancing homeowners want to achieve the very best value on closing costs, they should follow these three simple steps:

1. Shop mortgage terms

Since most mortgage lenders today all charge about the same in origination and ancillary charges (i.e., Processing Fees, Document Preparation Fees, Appraisal and Credit Report Costs, Tax Service Fees, Flood Certification Fees, etc.), it’s best to stay focused on the interest rate compared against loan term and payment of any discount points. For example, if you are in the hunt for a 30 year fixed rate without paying “Discount Points,” then compare the interest rate offered by several different lenders.

2. Shop title company settlement fees

While your real estate agent and/or mortgage lender may recommend or refer you to their preferred title company, the title company may not be providing you, the consumer, the best value since they are likely providing a financial benefit to the referral source (i.e., the real estate broker or mortgage company). This means that since the preferred title company is sharing some of its profits with the referral source, they are either charging you higher settlement fees or, at the very least, are unable to provide you lower settlement fees compared than customarily charged in the marketplace.

Thus, it is important that you shop for the best settlement fees among other locally established title companies. A simple Google search for will allow you to compare settlement fees among other local title companies. Be sure to make an apples-to-apples comparison since some title companies charge an all-inclusive flat fee while others itemize numerous charges such as: Settlement Fee, Title Search, Title Examination, Document Preparation/Processing, Notary Fees, Courier Fees, etc.

3. Shop title insurance rates

While nearly all jurisdictions regulate title insurance, which requires title insurance underwriters to file their respective rates, there is very little difference in title insurance premiums among various underwriters. However, while you are shopping for settlement fees with local title companies, check their title insurance rates and inquire as to whether you may be entitled to a “reissue rate” discount on the title insurance premiums to be paid at closing.

Typically, if your seller has owned the property for less than 10 years and possesses an owner’s title insurance policy, you should be entitled to either a partial or full reissue rate; depending on the amount of the existing coverage.

Agents can define 'settlement costs' in sales contract to protect clients

A closing at Federal Title last week resulted in a dispute between the buyer and seller over the definition of "settlement costs" that could have been avoided had the GCAAR Regional Sales Contract better defined the term.

I'll get to the language in just a moment real estate agents, but first let me tell you what the dispute was all about so your clients can avoid a similar situation at the settlement table.

In this case the seller had agreed to give the buyer a credit of $20,000 toward the buyer's settlement costs as per the GCAAR Addendum of Clauses paragraph #1. The contract provision read as follows:

"In addition to any other amount(s) the Seller has agreed to pay under other provisions of this Contract, the Seller shall credit the Buyer at the time of Settlement with the sum of $20,000 toward Purchaser’s settlement costs. It is the Buyer’s responsibility to confirm with his Lender, if applicable, that the entire credit provided for herein may be utilized. If Lender prohibits the Seller from payment of any portion of this credit, then said credit shall be reduced to the amount allowed by Lender."

Specifically, the 6-month Montgomery County, MD tax bill of $3,700 was itemized as a charge to the buyer on the HUD-1 Settlement Statement. This tax bill was required to be collected and paid at the time of closing as a requirement for recording the deed with the Montgomery County, MD clerk’s office. Further, this tax bill covered future taxes to the benefit of the buyer, covering the tax period of January 1-June 30, 2013.

In most cases, a lender will not allow any prepaid items (i.e., taxes, escrows, etc.) to be counted as settlement costs against the seller credit. However, in this case the lender allowed all settlement costs, including prepaid items, to be counted against the seller credit.

The seller argued that the $3,700 tax bill was not a "settlement cost" and thus, the credit should be reduced to $16,300. The buyer, on the other hand, argued that all items appearing on the HUD-1 Settlement Statement should be defined as "settlement costs" and that definition should include the prepaid taxes in this case since the payment of the taxes was a condition of closing – the taxes had to be collected by Federal Title and paid to Montgomery County, MD clerk’s office in order to record the deed.

Since "settlement costs" are not defined in the GCAAR Regional Sales Contract, the parties languished for a good length of time over the meaning and whether prepaid taxes should count against the seller credit.

How can real estate agents protect their homebuyers?

Agents would be well-advised in representing their client’s best interest to add their own definition of the term "settlement costs" to the GCAAR Regional Sales Contract. For example, if you are acting as a buyer agent where a seller credit exists, I would recommend adding an addendum or additional provision to the contract that reads:

"The parties understand and agree that "settlement costs," as the term is used throughout this entire contract of sale, shall mean all charges itemized and charged to the buyer on the HUD-1 Settlement Statement, including, but not limited to, prepaid and pro-rated taxes, escrow reserves, and prepaid interest, and as allowed by the buyer’s lender."

See how Federal Title stacks up against national, local closing cost averages

The cost of buying a home dropped 12 percent from last year, according to a survey conducted by Bankrate.com, which reports homebuyers nationally pay $2,159 on average for title and closing costs.

The numbers vary a bit by state, but in every case Federal Title charges less than average for title and closing costs. In the District of Columbia, for example, homebuyers pay an average of $2,319 compared to $2,176 when they settle at Federal Title.

Closing costs in the District of Columbia rose to 10th place on the list of most expensive closing costs in the country from its 11th place position in 2011.

Average closing costs in Maryland and Virginia are quite a bit less than the national average, coming in at $1,997 and $2,046 respectively. Maryland homebuyers who settle at Federal Title pay $1,691 while their Virginia counterparts pay $1,696.

This year closing costs in Virginia are on average the 29th most expensive in the country, a big jump from the No. 38 position the state held last year. Maryland also jumped up on the list to 35th most expensive closing costs on average from 42nd in 2011.

Did you know Federal Title has a sister office in Coral Gables, Florida? Homebuyers in the state pay an average of $2,772 for title and closing costs compared to the $2,486 paid by homebuyers who settle with us.

Closing costs on average in Florida were 12th most expensive in 2011. This year Florida has the 4th highest closing costs on average.

These numbers come as no surprise to Federal Title. A similar closing costs study conducted last year using slightly bigger numbers also demonstrated that our title charges are among the most competitive in the region, and in most cases (DC & Maryland) top the competition.

Bankrate used the following parameters to gather Good Faith Estimates from 10 lenders in each of the 50 states and the District of Columbia for their June 2012 survey:

  • Loan amount: $200,000
  • Down payment: 20 percent
  • Purchase price: $250,000

View average closing costs by state

To calculate Federal Title's charges, homebuyers should use our Quick Quote tool. It is the easiest and fastest way to calculate closing costs. It's free to use and completely anonymous – we don't ask for your e-mail address.

Refis save on closing costs with Absolute Reissue Rate

If you are about to refinance your mortgage, your mortgage lender has or will soon provide you with a Good Faith Estimate (GFE) which will include, among other costs, a line item charge for title insurance.

Although you are required to pay for it, this is "lender’s" title insurance as opposed to the "owner’s" title insurance, which you likely purchased at the time of your original closing.

The lender’s title insurance premium is often the single most costly line item for refinancing homeowners. While it’s the borrower's right to choose a title company, unfortunately, thousands of borrowers are allowing their mortgage lender to choose a settlement company on their behalf.

As a result, they are sometimes paying hundreds of dollars more in title insurance and settlement fees than if they spent a few minutes online shopping among and choosing their own title company.

Some title companies require proof of an existing owner’s title insurance policy less than 10 years old in order to obtain a discount (or Reissue Rate) on the new lender’s title insurance premium, while other title companies provide an Absolute Reissue Rate.

An Absolute Reissue Rate is a discounted rate on the title insurance premium without requiring the homeowner to provide any evidence of existing owner’s title insurance coverage.

For example, Bob purchased his home more than 10 years prior to his current mortgage refinancing and Title Company A, selected by Bob’s lender, charged $1,200 for lender’s title insurance because they require – and Bob could not produce – a copy of an existing owner’s title insurance policy less than 10 years old.

In the alternative, Jane also purchased her home more than 10 years prior to her current mortgage refinancing. However, wisely, Jane compared title charges among local title companies and chose a title company that didn’t require proof of an existing owner’s title insurance policy.

Jane paid $720 compared to Bob’s $1,200 charge for lender’s title insurance.

Federal Title is one of the few title companies in the District of Columbia, Maryland, and Virginia that provides an Absolute Reissue Rate to all its customers.

Say good-bye to the HUD-1 Settlement Statement

The Consumer Financial Protection Bureau (CFPB), by mandate under Dodd-Frank, will soon change our world once again.

Just barely two years since the title and mortgage industry was turned upside-down with regulatory changes to the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedure Act (RESPA), the CFPB will be releasing its proposed forms and regulations next month to replace the HUD-1 Settlement Statement, Good Faith Estimate, and Truth-in-Lending Disclosure.

These new forms will be known as the Loan Estimate and Settlement Disclosure Form.

On its snazzy website, CFPB states that the current 3-page HUD-1 settlement statement is replete with "... Technical and legal jargon ... that may be more confusing than helpful. Complicated and lengthy disclosures can make it hard to answer or even ask the right questions."

So CFPB’s solution is to do away with the current 3-page HUD-1 and replace it with a lengthier and more complicated 5-page document called the Settlement Disclosure Form.

This is hardly an improvement. In our experience at the closing table, homebuyers are less likely to review lengthier disclosure forms compared to short form disclosures.

Among other things, these new CFPB forms will require lenders and settlement service providers to overhaul their existing software production systems, re-tool the lender-to-title company interfacing, and re-train staff members — which means homebuyers will end up paying more at settlement.

Currently, homebuyers pay, on average, $750 for total settlement fees in the Washington DC metro area. With little, if any, benefit to the consumer, I expect that figure to increase to approximately $1,000 with the implementation of these new CFPB forms and regulations.

The current disclosures are more than adequate. At the risk of sounding astringent, if a homebuyer can’t understand the HUD-1 Settlement Statement in its current form, then perhaps that homebuyer shouldn’t be a homebuyer.

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