Question about closing costs

4 Replies

Hello!

I have a question about closing costs...I've reached out to 4 lenders and secured pre-approvals with each to compare their rates, fees, etc.

For a 25% down payment with 1 point on a $200,000 investment property, they're estimating closing costs between $7000 and $8000 (which includes prepaids, insurance, etc.). 

However, I notice in the BP rental calculator tool that it recommends I estimate closing costs to be between $1500 and $2500. 

Out of curiosity, I did a quick google search for "average closing costs paid by buyer" and am seeing that it's customary for closing costs to amount to 2-5% of the purchase price...so between $4000 and $10,000 for that $200,000 property. 

Should I just go with what the mortgage bankers quoted me or am I missing something? I just want to make sure I'm using the right assumptions when running my calculations.

Thank you!

@Daniel Soovajian - Great question! I work here at BiggerPockets. Those question marks above the calculators are good if you literally have no idea and just need something to fill in. It ranges for many different reasons.

If the lender you are planning to use says it is going to charge you $7k-$8k then put that number in there.

Though, I must admit that does sound high. I would recommend talking to a few different lenders. I paid less than $5,000 in closing costs and I bought two properties north of $340,000. 

Originally posted by @Daniel Soovajian :

Hello!

I have a question about closing costs...I've reached out to 4 lenders and secured pre-approvals with each to compare their rates, fees, etc.

For a 25% down payment with 1 point on a $200,000 investment property, they're estimating closing costs between $7000 and $8000 (which includes prepaids, insurance, etc.). 

However, I notice in the BP rental calculator tool that it recommends I estimate closing costs to be between $1500 and $2500. 

Out of curiosity, I did a quick google search for "average closing costs paid by buyer" and am seeing that it's customary for closing costs to amount to 2-5% of the purchase price...so between $4000 and $10,000 for that $200,000 property. 

Should I just go with what the mortgage bankers quoted me or am I missing something? I just want to make sure I'm using the right assumptions when running my calculations.

Thank you!

 If they are assuming impounds for taxes and insurance, that could be $3500 right there. This is money you bring to closing, but not a true closing cost, since you would incur property taxes even if you didn't get a mortgage, and presumably would also want homeowner's insurance.

$3500 left... ballpark $2k title/escrow, ballpark $1500 lender fees/appraisal, and we're at $7k. Buffering by $1k onto that to ensure you aren't short cash to close at the last minute isn't crazy at all. 

Closing costs do not scale up and down in a linear manner with purchase price, so there's no point in expressing it as a percentage. 

Very helpful - thank you @Craig Curelop and @Chris Mason

It looks like the lenders are baking taxes and insurance into the closing costs - as "prepaid items / reserves" - which amount to around $2000.

The actual "closing costs" themselves amount to $5500 for a loan with 1 point - which includes title fees, state tax, processing, underwriting, appraisal fees, etc.

Sounds like it can't hurt to do a bit more shopping but I definitely feel better that these costs are more in line with what's to be expected.

@Daniel Soovajian

There are many items that encompass closing costs which you mentioned(title work, loan origination costs, prepaids real estate taxes, insurance paid at closing, appraisal, etc)

It should also be known that unless you are a week before closing - the lenders are providing you a rough estimate on what the closing costs will be. From my experience they are conservative and overshoot the costs.

The lender dictates loan origination costs and appraisal costs. 
Almost everything else should be at your discretion or same regardless of what lender you go with.

So if your goal is to shop for a lender - I would ask what rate he's giving you, his loan origination costs and the cost of the appraisal.
Also - you want to ask for similar loans across the lenders to compare apples to apples(30 year fixed, 0 points compared with a 30 year fixed 0 points).