According to Bankrate’s annual closing cost survey, mortgage-related fees for home buyers rose 6% in 2013, compared to last year. On average, a home buyer taking out a $200,000 loan in 2013 paid $2,400 in mortgage origination fees and other third-party fees such as appraisals.
In 2012, the average closing cost at this price point was $2,264. That marks a 6% increase from 2012 to 2013.
Mortgage origination fees played a large role in the overall rise in closing costs. These fees, which are charged by lenders when they first evaluate a borrower and prepare the loan, rose 8.4% in 2013 compared to the previous year.
Are Lower Mortgage Rates Leading to Higher Closing Costs?
So what’s causing home buyer closing costs to rise? According to Anthony Sanders, a real estate and finance professor at George Mason University, low mortgage rates have something to do with it.
Thanks in part to the Federal Reserve’s stimulus program known as quantitative easing, mortgage rates fell to record lows in 2012. This led to a surge in home refinancing and a flood of new business for mortgage lenders. So the marketplace was less competitive.
Higher demand allows lenders to charge higher fees. This is partly why closing costs (and mortgage origination fees, in particular) have risen over the last year. But rates have risen by nearly a full percentage point since the all-time lows we saw in November 2012.
“Banks realize that rates are going to go up and are trying to capture fees early on,” Sanders told Bankrate. “They know when rates go up, loan applications plunge, so they are trying to generate more earnings on anticipation of lower application volume and lower profits.”
Higher operating costs resulting from new government lending rules are also affecting closing costs. Lenders are having to adapt their procedures to comply with the new rules. The qualified mortgage (QM) rule, which was finalized in January 2013, takes effect in January 2014. Some lenders have reported having to hire additional compliance personnel to keep up with new rules and regulations. Such costs are often passed along to the borrower, in the form of higher origination fees and other closing costs.
5 Most Expensive States for Loan-Related Fees and Charges
According to Bankrate’s survey, mortgage closing costs are currently highest in Hawaii, Alaska, South Carolina, California and New Mexico. In Hawaii, total closing costs for home buyers averaged $2,919 in 2013, more than $500 higher than the national average for the same year.
While the Aloha State had the highest total closing costs and third-party fees, it ranked #2 for lender’s fees, behind California. Out of all 50 states, California had the highest average for mortgage origination fees in 2013.
Good Faith Estimate (GFE) Helps Borrowers Prepare
Borrowers typically receive an estimate of closing costs up front, shortly after applying for a loan. It comes in the form of a Good Faith Estimate (GFE) form, a standardized document that is required by the federal government.
According to the Real Estate Settlement Procedures Act, or RESPA: “the loan originator [bank or mortgage company] must provide the standard GFE to the borrower within three business days of receipt of an application for a mortgage loan.”
Good Faith Estimates are not required in cases where the applicant is rejected before the end of the three-business-day period.
Page 2 of the standardized GFE form shows how the lender arrived at their estimate. It provides a line-item breakdown of the different closing costs associated with the mortgage loan. Here is a snapshot of that section of the document:
Just bear in mind that the finalized costs due on closing day may be slightly more than the estimate given on the front end. While some fees and charges are not allowed to rise between GFE and closing, others can rise by up to 10%.