As all agents know, regardless of locale, sky high mortgage costs are keeping many buyers out of the market. However, alleviation may be coming as home prices are expected to decline a bit this year (yet supply will stay low) and mortgage rates are projected to drop some next year. Still, buyer closing costs can vary wildly, elevate quickly and be difficult to understand – no matter the economic situation. Educating buyers early in the buying process on rates, home price fluctuations and broader closing costs paves the way for a smoother home-buying process and helps them anticipate things that seemingly add up in the path to closing.
Lender Fees a Sizable Chunk
A good way to break it down for buyers is by costliest fees, which is almost always the lender fees. Agents can guide clients to reputable lenders who will work closely with them to find the best fit for their financial situation. These can range from 0%-2% of the purchase price, and the same lender may offer different fee structures depending on loan specifics. A decision buyers must often make is whether they want a higher interest rate with lower fees or a lower interest rate with higher fees. Since interest rates increased substantially in Q2/Q3 2022, buyers are now considering rate buydowns, which cause these fees to go up beyond 2% and even to 3%-4%.
Prepaid Expenses and Escrow
Next are prepaid expenses, which can appear as closing fees but are actually expenses buyers pay no matter what like property taxes and insurance. Best to prepare buyers early for these expenses and pay through a popular escrow account. This strategy will ensure that there are no surprises to the buyers and no misunderstandings as to what these fees are. Other closing costs include things like escrow fees and appraisal fees. These vary depending on location and other factors, but they’re generally not a significant expense.
Negotiating Who Pays
One essential step upfront is determining which party will pay the broker fee. The broker fee is historically paid by the seller, but in rare cases, the buyer may absorb this cost. There is a lengthy class-action lawsuit against the National Association of Realtors that could considerably disrupt this situation by requiring that buyers compensate their agent while sellers compensate their agent.
One thing that buyers may not realize is that they can also negotiate to have the seller pay some or all of their closing costs, yet, this can come at the expense of a higher home purchase price – essentially “rolling these fees into” the price of the home. For instance, instead of asking for $5,000 off the price of a home, the seller pays $5,000 in fees. The total cost to the buyer is the same. It’s essential to work with an agent who understands the pros and cons of these approaches and determine the best transactional strategy.
Clarity Comes with Expertise
Buyer closing costs can seem complicated, but with the right guidance and education, buyers and their agents can navigate the process successfully. Ultimately, working with a real estate agent who has experience in the local market will help ensure there are no surprises during the closing process around fees and costs, even amidst our country’s changing real estate financial landscape.