Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.

What Happened to Affordable Homes?

If you’ve been paying attention to home prices in greater Cincinnati over the past few years, you’ve probably noticed a trend: homes that were selling for around $150,000 in 2018 are now selling for well over $200,000. In fact, in many areas it is nearly impossible to find a move-in ready home for under $200,000. So, what happened?

The short answer is that we have been dealing with a shortage of homes for sale since 2012 or so. Remember that mortgage crisis circa 2008 - 2011? Many builders didn’t survive the sudden influx of foreclosed homes for sale, and others became much more conservative about building on spec (i.e. without a ready buyer) and financing terms.

As you can see in the chart above, newly completed single family homes haven’t even returned to half of the levels we were seeing in 2005. Think about it this way: over the past 18 years of population growth, not to mention the normal major life events that usually result in a move, builders in the Midwest have not built even half of the number of homes they had built prior to that. Could this have just been a market correction, though? Were builders in 2005 building way too many homes?

Nope. Over the same 20 year period, new household formation in the USA shows an obvious and steady increase (I’m very curious to know what that spike in 2020 was…maybe in a later post!). So, we saw an increase in demand for housing that was not compatible with supply levels that were not growing at the same rate. This led to increasing home prices in many markets, which was great for existing homeowners, many of whom had built more equity than they expected and continue to do so. For first time buyers the situation was a little more complex, but that’s a whole other post.

At the same time, many older homeowners were facing tough decisions about their long-term housing needs in the face of a struggling stock market and increasing long-term care costs. Some chose to age in place, so they opted to improve or adapt their homes to their changing needs. First floor bedroom suite additions, elevators, in-home caregivers, and inviting extended family to move in were all strategies for retirees who felt they had no great options. More recently, we’ve seen them reconsider moving because they don’t want to give up their attractive mortgage interest rates (assuming they refinanced within the past 4-5 years). This has further affected the number of homes available for sale.

The moral of the story is this: don’t wait for home prices to go down if you need to move. There is no reason for prices to drop until our supply issue is resolved, and that will take years (construction takes time, and good quality construction takes even more time). Interest rates will probably decrease over time, but I also wouldn’t recommend waiting around for those sub-3% rates we were seeing during the height of the pandemic. Focus on your needs today instead: if you need to buy, sell, or both, work with a professional to determine what your options are.

Great Neighborhoods: Pleasant Ridge

Comey & Shepherd

Once a well-known crossroads for travelers between Cincinnati and Zanesville, Pleasant Ridge is a historic neighborhood that is experiencing a revitalization almost universally admired and approved by its residents and surrounding areas. Its tree shaded streets and central business district along Montgomery Road make for a truly walkable neighborhood, yet it is still within easy distance to local highways. Locally-owned businesses thrive here, and word is there's even more on the way. Housing prices in Pleasant Ridge have risen about 1.8% in the last year, with plenty of renovation activity and a diverse population. The median age of homes in this area is 79 years, so there's plenty of historic architecture to fall in love with!

• SUPER CUTE STARTER HOME: This 2 bedroom, 1.5 bathroom home on Mapleleaf Avenue has a one-car garage and an updated kitchen. 1,030 square feet of old world charm at an affordable price point comes with a fenced backyard as well! $109,900
• TWO STORY STUNNER: Located on desirable Grand Vista Avenue, this 4 bedroom, 3 bathroom home has a private deck off the master suite and a rare-for-the-area two car garage. Check out the enclosed front porch included in the 1,712 square foot home. $189,900
• KITCHEN OF YOUR DREAMS: I toured this one just the other day! Only a block from shops and restaurants, this 3 bedroom, 1.5 bathroom home has a built-in 1 car garage and plenty of updates. The huge eat-in kitchen is gorgeous, and the bedrooms are generously sized as well -- you'd never know this home was only 1,392 square feet. $209,900
• SO MUCH SPACE: Another lovely 4 bedroom, 3 bathroom home, this one is 114 years old and has garage parking for 3 cars. With a 2nd floor laundry and open high ceilings, original stained glass and hardwood floors, you don't want to miss this 2,418 square foot home. $239,900

If you're looking for a home in Pleasant Ridge, keep in mind that the market here is pretty hot, with the best homes selling very quickly and often going into multiple offers. The best deals will be on homes that still need some updating -- maybe a bathroom, or an unfinished basement.

Great Neighborhoods: Clifton

"Clifton-Cincinnati-map" by Wholtone - http://www.openstreetmap.org/

Back to the list helpfully compiled by Cincinnati USA! Today's featured 'hood is Clifton, home to the University of Cincinnati, a few hospitals, the fantastic Cincinnati Zoo, and some of the most popular night life in the city. From concerts at Bogarts on Short Vine to ethnic food and specialty shops on Ludlow, Clifton has plenty to see and do. Thanks to the high population of university students, this area is also very walkable -- making a property in this area great to live in OR to rent out for nearly guaranteed income! While there are several subsections of what many of us know as Clifton, including Clifton Heights, University Heights, Corryville, and Avondale, for the purposes of our home search we'll use the MLS-defined area of Clifton.

• CRAFTSMAN BUNGALOW: This 3 bedroom, 1.5 bathroom single family home on Foulke Street has gorgeous details and a back deck. The front porch has been enclosed to add more usable space for a total of 1,393 square feet, and the roof was replaced this year! $103,900
• 2.5 STORIES, 100 YEARS OF HISTORY: This 3 bedroom, 2 bathroom single family home on Southview Avenue boasts an updated kitchen, newer roof, and a large open room on the 3rd floor that could be used as a fourth bedroom. With just over 2,000 square feet of living space, you could live here yourself or rent it out! $124,900
• DOUBLE LOT WITH A VIEW: Buy it now and rent it out when you upsize -- this 2 bedroom, 1 bathroom home on Klotter Avenue has great views from the 2nd floor deck and a private backyard. Plenty of updates in this 1,200 square foot home, including the kitchen and bathroom. $125,000
• MOVE-IN READY CONDO: This 2 bedroom, 2.5 bathroom condo is in the basement of a 120 year old former single family, but there's plenty of light and open space! There is a private entrance, but the HOA takes care of the big stuff (including hazard insurance). Definitely worth looking at the 1,290 square foot unit, created only 5 years ago with great finishes. $129,000
• UPDATED GEM OVERLOOKING PARK: This 3 bedroom, 2.5 bathroom home has been completely renovated -- and qualified for tax abatement! This one features a master suite and a rear deck that overlooks Fairview Park. For 1,536 square feet this close to downtown, $199,000 doesn't seem too bad!

Hope you enjoyed the tour! There's plenty more on the market in Clifton, but move-in ready homes in the Gaslight district are definitely selling more quickly than anything else. For investors considering buying in Clifton, be sure you consider carefully how many bathrooms you have for all the bedrooms -- even college students need some privacy!