Suneet Singal on closing costs

Suneet Singal’s readers in real estate and corporate finance already know that a total is only as clear as the lines inside it. Closing costs are those lines. They are the charges, prepayments, and deposits required to originate a mortgage and transfer a house, gathered on a Loan Estimate and later on a Closing Disclosure. They are not the down payment, though the down payment and the closing costs meet in the cash-to-close total. This entry explains how to read that stack, which comparisons are fair, and why a percentage overheard in a conversation is not a substitute for the form. It quotes no current fee schedule and no current home price. A fee that is not on a form in front of you is not yet your fee. The Consumer Financial Protection Bureau publishes the form and a guide to it. This page is a reading companion for that guide, not a lender’s closing statement and not personal financial advice.

A stack, not a single fee

Closing costs are a stack of different charges that happen to be due around the same day. An origination charge pays the lender for making the loan. An appraisal fee pays an appraiser. A title charge pays for a title search, a title policy, or a settlement service, and the Loan Estimate separates services the borrower can shop for from services the borrower cannot shop for. Recording fees and transfer taxes are government charges. Prepaids cover items such as homeowner’s insurance and interest for the days before the first regular payment. An initial escrow deposit funds the account the servicer will use to pay future taxes and insurance. Putting all of those under one nickname is convenient. It is also how a buyer ends up surprised by a line that was never the origination charge.

The Consumer Financial Protection Bureau’s Loan Estimate is organized so the stack can be read in groups. Loan costs are in one group. Other costs, including government charges, prepaids, and the escrow deposit, are in another. A total closing-cost figure adds the groups and then shows lender credits. A reader who looks only at the total will not know whether a high number is a high origination charge, a local transfer tax, or several months of taxes deposited in escrow. Those three causes lead to different questions. The first is a question for the lender’s competitors. The second is a question about the city and county, not about the lender’s margin. The third is the buyer’s own money, staged in advance, and it is not a fee in the same sense.

Suneet Singal’s site treats this the way a corporate-finance reader would treat a closing binder on any other transaction. Name the payee, name what the payment is for, and do not let a subtotal inherit a definition it has not earned. The owning-a-home pages at the CFPB are the public tour of the same form. When this entry and that tour differ in emphasis, the form and the Bureau’s guide control. This entry’s job is to slow the reader down at the points where a housing conversation usually speeds up.

Cash to close is the number that includes the down payment

The cash-to-close calculation is where the down payment, the closing costs, credits, and adjustments are combined. A buyer who has been told “closing costs are the cash you need” and a buyer who has been told “the down payment is the cash you need” can both be holding a half of the table. The table is the whole. Deposits the buyer has already paid, such as earnest money, reduce the cash still due. Seller credits reduce it as well. A lender credit reduces closing costs and therefore reduces cash to close, often in exchange for a higher interest rate. None of those adjustments is obvious from a down-payment percentage.

Read the rows in order and keep their signs. A credit that appears as a negative number is supposed to reduce the total. Dropping the sign is a common way to double-count or to erase a concession the contract actually gave. If a row is labeled as an adjustment for a seller-paid item, confirm that the purchase contract contains the same concession. The form is not supposed to invent a seller credit the parties did not agree to. If the contract and the form disagree, the disagreement is a question for the loan officer and the settlement agent before signing, not a detail to average away.

Cash to close is also not the buyer’s long-run cost of owning the house. It is a funding requirement for a day. A large initial escrow deposit raises cash to close and then sits in an escrow account to pay bills the buyer would have owed anyway. Describing that deposit as money lost, in the same sense as a nonrefundable fee, misstates it. Describing it as optional misstates it too, when the loan requires the escrow. The accurate sentence is that the deposit changes when the money leaves the buyer’s account. The entry on what a down payment changes keeps the down payment itself distinct. This entry keeps the rest of the cash distinct from that down payment.

Prepaids and escrow deserve their own reading

Prepaid interest is a useful example because the form shows the multiplication. It may state a dollar amount per day and a number of days. If a worksheet, labeled as a worksheet, says $50 a day for 15 days, the prepaid interest on that worksheet is $750. The $50 and the 15 are not a market quote and not a rule about how many days a closing always covers. They show how to read a row that already contains both factors. On a real estimate, copy both factors and multiply. Do not replace them with a month of principal and interest, which is a different concept and usually a different dollar amount.

Homeowner’s insurance is often collected at closing for the policy period the lender requires, commonly a year, and the escrow account may also collect a cushion of future months. This page will not state a required number of months. The form states the number it is using, and the policy states the premium. A reader who wants a current premium has to get it from an insurer on the house in question. A national average would describe no particular roof. The same discipline applies to property taxes. The estimate uses a tax figure. In California the ongoing tax bill is shaped by rules the property-tax entry discusses at a high level. Closing is where an estimate of taxes becomes a deposit. It is not where the assessment system is fully explained.

Initial escrow and monthly escrow are related and are not the same line. The initial deposit is cash at closing. The monthly escrow is part of the ongoing housing payment, alongside principal, interest, and any mortgage insurance. A buyer who plans only for principal and interest, and then meets a payment that includes escrow, has not discovered a new fee so much as a bill that was always going to be paid to the taxing authority and the insurer. The servicer is the collection path. Reading the projected payments on the Loan Estimate, including the escrow portion, prevents that misunderstanding. The mortgage-insurance entry covers the case where a further line sits in the same payment.

Credits change the cash and sometimes the rate

A lender credit reduces what the borrower pays in closing costs. On the form it is visible as a credit against the charges. The trade, when there is one, is often a higher note rate than the rate offered with no credit, or with discount points paid by the borrower. Discount points are upfront interest paid to reduce the rate. A credit is the mirror image in many rate sheets: upfront money from the lender, attached to a higher rate. Comparing a loan with points against a loan with a credit by looking only at cash to close will favor the credit. Comparing them by looking only at the rate will favor the points. The honest comparison uses both, and it uses a time horizon, because the higher rate lasts as long as the loan does and the cash difference happens once.

This page does not compute a break-even month for a reader. A break-even calculation needs the actual rate difference, the actual cash difference, and an assumption about how long the loan stays in place. Those inputs belong to two Loan Estimates on the same property, same loan amount, and same term. Without them, a generic “points pay off in four years” sentence is folklore. Folklore may coincide with someone’s file and will not coincide with everyone’s. If you run the arithmetic, label the inputs with the lender’s name and the date of the estimate, and label the holding period as an assumption.

Seller credits are a contract term with program limits that this page will not invent. Different loan programs cap how much a seller may contribute, and the cap can depend on the down payment or the occupancy. A remembered cap is a good way to misread a contract. Ask which program rule applies to the file, and read the cash-to-close row only after the credit on the form matches the credit in the contract. A seller credit can make a smaller down payment feasible by covering closing costs, or it can be a substitute for a price reduction. Those are different negotiations. The form will not tell you which negotiation you are in. The contract and the price will.

How to compare two estimates

A fair comparison holds the property, the loan amount, the term, the rate type, and the purpose of the loan steady, and then reads the interest rate, the annual percentage rate, the cash to close, and the monthly principal and interest. The annual percentage rate folds certain loan costs into a rate so that a loan with a low note rate and high upfront charges can be compared, imperfectly, with a loan that has a higher note rate and a credit. Imperfectly, because the annual percentage rate relies on assumptions about how long the loan lasts. It is still more informative than the note rate alone, which is why the Loan Estimate prints both in the comparisons section. Read both. Then read the five-year table, which shows how much of the loan would be paid down and how much would have been paid in total under the form’s assumptions.

An unfair comparison changes two things at once and then announces a winner. A 15-year loan will often show a higher monthly principal and interest and a lower rate than a 30-year loan. That does not mean the 15-year lender is “more expensive” in any simple sense. An adjustable-rate loan and a fixed-rate loan are different products. A loan with mortgage insurance and a loan without it are different monthly obligations. Line those differences up in words before you line the cash-to-close numbers up in a column. The interest-rate entry on this site walks through the payment formula. Use it if the principal-and-interest figures need to be audited. Use this entry if the audit is about fees, credits, prepaids, and escrow.

Services the borrower can shop for are a particular trap in comparisons. One lender’s estimate may assume a title company, and another may assume a different company and a different charge. The CFPB materials explain that shopping for those services can change the figure. A comparison that treats every title charge as the lender’s profit will misidentify the payee. Look at the column that names who receives the payment. Origination charges and lender credits are about the lender. Third-party charges are about the third party, unless a lender-selected service has been marked up in a way the form lets you ask about. Asking who is paid is the whole method.

What a rule of thumb leaves out

People repeat rules of thumb, such as a closing-cost range stated as a percent of the price. This entry does not endorse a percent. A percent that is not tied to a jurisdiction, a loan program, a price, an escrow policy, and a date cannot be checked. Transfer taxes vary. Escrow deposits scale with taxes and insurance, which do not move in lockstep with a lender’s fee schedule. A buyer of a low-tax house and a buyer of a high-tax house can face very different cash-to-close figures for reasons that have nothing to do with who is the more expensive lender. Publishing a percent here would invite exactly the false precision the Loan Estimate was built to retire.

If a percent is offered by a friend, a video, or an older article, write down what it claimed to include. Did it include the down payment? Did it include prepaid taxes? Did it include mortgage insurance? Then set it beside a Loan Estimate and see which rows it was trying to approximate. The estimate will be more specific, and it will have a lender’s name on it. The percent can stay in the notes as a rough expectation that was replaced. It should not be forwarded as if it were the estimate.

The same restraint applies to “no-closing-cost” marketing. A loan with no cash closing costs is often a loan that has moved those costs into the rate, into the loan amount, or into a credit that is paid for over time. Sometimes a seller really is paying the costs. The cash-to-close line can be zero for more than one reason. Ask which reason the form is using. A zero that comes from a higher rate is a financing choice. A zero that comes from a seller concession is a contract choice. They feel the same on moving day and they diverge every month after that.

A short reading order

Read page one of the Loan Estimate for the loan amount, the interest rate, the monthly principal and interest, and the cash to close. Read the projected payments, including any mortgage insurance and escrow. Read the loan-cost group and the other-cost group, and note lender credits. Read the cash-to-close table to the last row. Read the comparisons, including the annual percentage rate, before deciding that the lowest note rate is the cheapest loan. When the Closing Disclosure arrives, repeat the reading and mark every row that moved. Ask why it moved while there is still time in the process the Bureau describes.

Keep a one-page note with the lender’s name, the date of the estimate, the loan amount, the rate, the annual percentage rate, cash to close, and the monthly payment including escrow and mortgage insurance if those are present. Four estimates can be compared from four notes. They cannot be compared from memory of which lender “seemed lower.” Suneet Singal’s housing reference stops at that discipline. It does not rank lenders, it does not know a reader’s price, and it does not turn a worked example about $50 a day of prepaid interest into a bill. The bill is the form. The form is the thing to trust, and to question, line by line.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

Continue with what a down payment changes, mortgage insurance, and interest rates and the monthly payment.