Closing costs are often overlooked by homebuyers, but they have been rising in recent years, making it even more difficult to afford a new home. In 2022, the median cost of closing costs for homebuyers was $6,000, a nearly 22% increase from the previous year. With a recent settlement by the National Association of Realtors set to take effect in July and the Biden administration cracking down on hidden fees in closing costs, the calculation for closing costs could soon change, potentially increasing costs for some homebuyers.
Not every buyer pays the same amount in closing costs, as the final bill depends on factors such as the state you live in, taxes, the type of mortgage loan, and the overall cost of the home. Closing costs can include various fees such as application fees, home appraisal fees, credit reporting fees, title insurance, and origination fees. Some states require an attorney at closing, adding to the overall bill. Some lenders roll closing costs into the total mortgage, increasing payments over time.
High-cost states for closing costs include New York, Delaware, and Washington, DC, while states such as Missouri, Indiana, and North Dakota have the lowest average closing costs. Closing costs typically range from 3% to 4% of the loan amount, adding thousands of dollars to the overall cost of buying a home. First-time homebuyers, in particular, may not be aware of these costs and should factor them into their savings when purchasing a home.
As part of a broader effort to reduce junk fees for homebuyers, the CFPB is looking into ways to lower costs. One example given by the CFPB is the increase in fees for credit reports, which have spiked by as much as 400% in some cases. Tackling junk fees is a good start, but it may not fully address the home affordability crisis, as structural issues in the housing market remain. The recent NAR settlement may also affect closing costs, as sellers’ agents are no longer required to offer commissions to buyers’ agents.
To lower overall closing costs, homebuyers are encouraged to shop around and compare rates from multiple lenders. According to Freddie Mac, getting multiple rate quotes can save homebuyers thousands of dollars over the life of the loan. Borrowers who received at least five rate quotes during the second half of 2022 could potentially save more than $6,000 over five years. Getting at least three mortgage offers and comparing both the rate and closing costs can help homebuyers choose the best deal. Multiple credit score pulls within a 45-day window won’t hurt your credit, so it’s essential to shop around for the best mortgage offer.
