Right now, for homeowners who are looking to refinance and homebuyers taking out a purchase mortgage, there’s a lot of good news when it comes to closing costs. Closing costs have fallen this year almost as much as they rose last year, though they can vary dramatically depending upon where you live. Plus, if you’re willing to put in a little legwork, you can save even more.

Closing costs include the fees and expenses lenders charge to originate your loan, such as the application fee, the rate lock fee, and origination points. Additionally, closing costs include third-party fees covering services and expenses charged by other vendors that are necessary to complete the lending process, like title insurance, appraisals, credit reports, taxes and transfer fees paid to local governments, and inspections.

The average cost to close on a $200,000 mortgage in the United States dropped 7 percent over the past year, to $3,754, according to Bankrate.com’s eighth annual closing costs survey. Title insurance and other third-party fees fell 12 percent from 2011, while origination fees edged down 1 percent. Closing costs work out to a little less than 2 percent of a mortgage—considerably less than the 5 percent often cited as a standard.

Because of state laws, local practices, and local costs for services, closing costs vary widely by state. New York has ranked the highest in recent years, with an average of $5,435. The next most expensive states are Texas, Pennsylvania, Florida, and Oklahoma. The least expensive state was Missouri ($3,006 on average), which was joined by Kansas, Colorado, Iowa, and Arkansas among the five cheapest states.

Last year, however, the average closing cost in Bankrate’s survey rose 8.8 percent over 2010, when it was $4,070 on a $200,000 loan. A big factor in this change was higher charges by lenders. On average, lenders charged about $1,614 in origination fees last year, up 10.3 percent from 2010. Origination fees include lender charges for services such as underwriting and processing. Fees imposed by third parties, including title, appraisal, postage/courier, and survey charges, averaged $2,456, up 7.9 percent from 2010.

Controlling closing costs with a good faith estimate

Consumers have a new secret weapon they can use to control closing costs, though most don’t take advantage of it. It’s called a good faith estimate, or GFE. Under law, all lenders are now required to provide a GFE when your loan application is accepted. The GFE includes accurate estimates of the costs the lender will charge as well as estimates of third-party costs that must be within 10 percent of what you finally pay.

Most consumers use the GFE simply to prepare for what they will need at closing, but you don’t have to stop there. Smart consumers use the GFE to shop around for lenders and for third-party service providers to see if they can do better. You can save hundreds, even thousands, with a little legwork on the Internet. Title insurance costs and escrow costs, for example, can vary by $500 or more each.

Consumers should shop around for at least three different estimates. While no one is going to move to a new state just because closing costs are lower, it’s important for people to realize that there is variation even within their neighborhood—and that they can save by being an educated consumer.

Saving a little on closing costs can mean a lot when you are facing a down payment on top of moving and decorating expenses. Closing costs require hard cash at closing in addition to your down payment, but it’s possible to finance them through your lender.

Today, many lenders offer a no-closing-cost loan where the lender pays your settlement costs for you, but be aware that you may end up paying a lot more over the life of the loan than you would at closing. If you choose this option, you will be taking out a higher loan amount, which could negatively affect your loan-to-value ratio and result in a dramatically higher interest rate. Some lenders may cover all costs, while others may still charge you for certain third-party fees such as appraisal, inspection, title, escrow, and even mortgage points.

 

Steve Cook is editor of Real Estate Economy Watch and covers real estate and mortgage finance for leading news sites.  He is a member of the board of the National Association of Real Estate Editors and was twice named one of the 100 most influential people in real estate. Cook was vice president for public affairs for the National Association of Realtors.