By James Rogers
When you’re thinking about buying a home, it’s easy to become obsessed with calculating your mortgage. You’re constantly tweaking the numbers after every open house, trying to understand what you can actually afford. The problem is that most mortgage calculators fail to account for closing costs hidden within the homebuying process, so they’re easy to miss. Just when you think you’ve saved enough for a down payment, you can get blindsided by substantial fees. This article explains how to estimate closing costs and how to get help paying for them.
Explaining Closing Costs vs. Prepaid Costs
Closing costs are paid when ownership is transferred to a home buyer. These fees cover everything from processing your loan application to hiring a courier service for your documents. Before diving into a discussion about closing costs, it’s important to distinguish them from prepaid costs. While closing costs are generated by the home purchase itself, prepaids are just normal expenses that are put into escrow when you close. Prepaids set you up for your early days of home ownership by covering future taxes, insurance, and interest. Closing costs, on the other hand, are one-time fees that leave your wallet forever once the paperwork is signed.
Estimating Closing Costs
The main categories of closing costs are lender fees and third-party fees. The lender side deals with everything associated with your mortgage. As the buyer, you’re responsible for paying fees for document preparation, loan processing, loan insurance, and tax services. Beyond these transactional fees, the lender also charges for committing to the loan, compensating the mortgage broker, and buying title insurance to protect their investment against ownership disputes such as unknown liens or boundary issues. The good news is that you can request an estimate from each lender and compare apples to apples to find the best deal. For third-party fees, however, the task of comparing quotes is much harder. You’ll likely spend hours on the phone trying to get pricing information from multiple companies across different lines of work.
The real cost of third-party fees is often your time. After submitting your offer, you’ll have a short window to coordinate between inspectors, appraisers, insurance agents, title companies, and attorneys. The logistics can feel overwhelming and it’s easy to lose track of what you’re being charged. Fortunately, there are tools to help you assess your closing costs before you even begin the homebuying process. A Closing Costs Calculator [available upon request] developed by Torii, a Boston-based tech startup, helps estimate what lenders and third-parties will charge based on your property value. Torii’s calculator also defines key terms and explains each fee.
Paying for Closing Costs
Now that you have a basic understanding of closing costs, you know how much to save beyond the down payment. However, before you resign yourself to paying thousands in fees, you should explore a few cost-saving alternatives. Being a military member or union member, for example, can entitle you to closing cost benefits. You can also ask the seller for a closing cost credit up to 6% of the sale price. This method works best in slow-moving markets where sellers are willing to incentivize a deal.
A more reliable approach is to negotiate with your lender. You’ll likely find banks that offer preferred customer reward programs, institutions that provide closing cost discounts, and loan packages that wrap closing costs into the mortgage. These options are less than ideal because you end up paying more in the long run through higher interest rates. If you’re getting frustrated by all the caveats, don’t despair! There is a high-tech solution that will cover your closing costs without any drawbacks.
Avoiding Closing Costs Altogether
A new way to buy homes is emerging with the growth of real estate tech. At the forefront is Torii, the first brokerage to pay all of the buyer’s closing costs. Torii’s mobile tech and automation results in lower operating costs than a traditional real estate agent and these savings are passed along to the buyer at close. Normally, 2-3% of the sale goes to your agent as a commission. With Torii, you not only get an expert agent, but you also get a cut of the commission to cover all your closing costs. Torii even has a mobile app that lets you track the entire homebuying process from your phone and manages your third-party vendors for you. Torii saves you twice over, removing your financial burden and your mental stress. In many cases, dealing with closing costs makes homebuying harder than it needs to be. While there are a variety of options for reducing these fees, Torii is a modern way to avoid them altogether.
(James Rogers is the CEO and Co-Founder of Torii. He sold his home in Boston to fund Torii and get it off the ground. James is an entrepreneur with a deep background in real estate and consumer technology. Before starting Torii, James founded multiple startups in Boston and ran teams at Jana, Happier, and Endurance International Group. James is a licensed real estate agent and holds a B.A. from Tufts University.)