WHY are closing costs so expensive?!

Question

I'm bleeding money on closing right now.

Background story is have a 65K house under contract. 20% down so takes 13K out. Closing costs total $4,271 !! That is 6.6%

Total, diming out 17.2K in cash.

I thought closing costs are roughly 2-3%?? I'm literally paying double and do not have the funds for it at this moment because I only budgeted for 2-3% closing cost. Am I getting ripped off by the bank/lender or is this normal?

*They want roughly $1000 for initial escrow payment at closing for homeowner's insurance and property taxes so I don't have to pay that in the next 6 months renting out to tenants leaves total Actual closing at $3,271, but that is still 5.2% in total closing costs!

Here's the breakdown from the lender:

Loan costs

Origination charges

Commitment fee $670

Origination Fee $520

Tax transcript Fee $40

Employment verification fee $37

Services you can shop for

Appraisal Fee $525

Credit Repot $33

Flood cert $12

SS Verification Fee $5

Tax service $85

Other costs

Recording fees and other taxes $108

Prepaids (prepaid interest $6.50 per day for 30 days @4.5%) $195

Initial escrow payment at closing

Homeowner's insurance and property taxes for 6 months: $937

TOTAL closing costs: $4,271

Cash to close: $13,000 + $4,271= $17, 271

Josh C. · Answer

Commitment fee is a little bogus, but........you need more money! What if the furnace goes out? What is a tenant trashes your house? You are playing with fire being so woefully undercapitalized. Seriously you need 10 grand in the bank after closing for Murphy's law. At least get a 10k LOC at some bank for all the stuff that comes up during investing. I just put in a $7500 HVAC system I wasn't planning on doing. It happens, and tends to happen more when you are broke. Good luck!

Marty Johnston · Answer

The commitment fee is not uncommon. A majority of the regarded lenders out there have these, but they may call them something different such as a processing fee or whatever else they might name it. Typically, these fees are credited at close and taken out of the pts involved - while I don't know if that's the case in this scenario, that's what we do. This fee gets a borrower to commit - once a borrower is offered a loan that they're happy with, hrs are spent on that file to get them rolling and closed. Brokers handle communications with collecting docs and correspondence in setting up title, insurance, lender, and borrower, and this takes a LOT of resources. Without that fee, I've seen borrowers continue to shop AFTER they've committed to a loan, and once we're a week from close, they back out because they can save a 0.5% in interest from another lender. That's an incredible amount of time and money wasted on both the broker and lender's end where they could have spent time elsewhere to produce, and can make their business incredibly inefficient.I often seen borrowers snark at these fees. We only charge $250 (again which is credited towards the pts involved at close of the transaction) and they aren't willing to do it even if it's a loan that they're apparently happy with and ready to move forward on. That's very minimal up front costs relative to the transaction, and it also helps sort out those who are really committed to moving forward and doing the deal, and the tire kickers who might waste everyone's time.Of course, I have nothing against shopping lenders, every investor ought to do so in order to acquire best returns on their investment! This makes sense, and lenders understand that process, but there's a point when the shopping needs to stopand the borrower ought to commit to one of the loan options presented to them by multiple lenders. If you aren't happy with any of your options at that time, simply say you aren't interested in your options before tons of resources are put towards your loan that will never happen.Just my $0.02! Hope this helps understanding the commitment fee a little better.Cheers everyone!Marty J

Seth Hayes · Answer

Mortgage brokers save banks money by doing the loan processing for them, leaving the banks to only be responsible for underwriting the loan. The banks and brokers typically work something out between them so the closing costs with a broker will look no different than if you went directly to the bank. Where a mortgage broker will save you money is that they have established relationships with multiple lenders. They've already done all of the footwork of finding banks, hedge funds, private money, and other lending institutions that will work with investors. They've learned all of their unique lending requirements and are able to quickly pair you up with a suitable lender. Whereas, an investor will call several banks and go with the first one that will lend to them because it is difficult to find a good commercial lending institution.

Nolan M. · Answer

Yep, sounds about right. I'm in contract for a 3plex for 78k, I'll be shelling out around 5k in closing costs plus 25% down. What makes it worse was I was originally told I could put 20% down, then my lender came back and said "oops" it has to be 25%. But about 2k of the closing costs are going to prepaid escrow items. Oh well, It costs money to make money sometimes.

JD Martin · Answer

I don't know about the commitment fee but on the other hand I don't see any title work costs listed. So if you aren't paying any title work costs other than your recording fee (which goes to the state/locality), it's probably a wash as your total closing costs don't look unusual to me. I did two cash out refis last year and those costs weren't out of line with what we paid, and that was on homes we owned for cash.

Tony Gunter · Answer

Peter Kim Yes, on the surface what you say makes sense. I think there are some behind the scenes incentives paid to brokers by many banks to bring them deals etc. that allows them to lower origination fees etc. I don't pretend to know the back room details of the mortgage broker business. I would only say that like the other items I mentioned, shop around. I don't think our assumptions are always accurate. Shop the loan and look at the details. That is the only way to be sure IMHO.

Peter K. · Answer

@Josh C. I agree, but thanks for the input@Tony Gunter I'm gonna have to call the bank and try to re-negotiate on that commitment fee because it is a huge chunk of my closing cost. Can you explain how a mortgage broker is cheaper than direct? Don't you have to pay a % of the loan for utilizing a mortgage broker? I feel like either way, you lose money if you go direct or mortgage broker looking for cheapest rates and charging you. Same same, no?

Tony Gunter · Answer

Commitment Fee? I call BS on that one. Other than that one nothing jumped out at me. I have never really considered property taxes and property insurance part of the actual "closing cost" myself. When evaluating the closing cost I look at things in a compartmentalized way. My attorney fees, I can shop that. My property insurance, I can shop that too. Fees associated with a loan, I can shop and/or negotiate that. Taxes, recording fees, etc. Well, they are what they are. I have actually found that often it cheaper to use a mortgage broker than going direct. My loan gets sold off before the first payment is due, but so what. If I get terms I am okay with, and it does the job of getting me in the property, mission accomplished.

Peter K. · Answer

@Brandon Hicks not using a broker, straight from a local bank.

Brandon Hicks · Answer

Sounds like you're using a broker....banks have the money...borrow direct.