Massachusetts comes steeped in American history and packed with New England charm, so it’s easy to see why people want to buy a home here. Are you a home buyer about to close your deal in the Bay State?
While you may have gotten a competitive interest rate for a mortgage and saved for the down payment, there’s another major hurdle you’ll need to overcome: paying closing costs.
Closing costs encompass all administrative and legal services you will need to pay for before you receive the keys to your new home. You pay these costs in a lump sum on closing day and typically amount to 2 percent to 5 percent of the home’s purchase price. Closing costs are paid along with your down payment, making it somewhat expensive.
If you’re buying a new home in Massachusetts, NewHomes here has put together the following guide on how much you should save for closing costs, a breakdown of what’s usually included, and how you can potentially reduce these costs.
How much are the closing costs in Massachusetts?
Closing costs in Massachusetts amount to, on average, $2689 for an average mortgage loan of $432,883, according to a 2021 report from ClosingCorp, which provides research on the U.S. real estate industry. That price represents 0.62 percent of the price of the house.
The Bay State is in the middle of the pack, ranking 22nd among the 50 with the most expensive closing costs. The national average for closing costs is $6,087.
But Massachusetts homebuyers should plan to spend much more than this initial estimate. ClosingCorp’s data excludes two major closing costs you’re sure to run into: loan origination fees (if you’re taking out a mortgage) and private mortgage insurance (if you have a down payment of less than 20 percent). Both expenses can add thousands to your closing costs tab.
Homes in Massachusetts are also hefty priced these days: As of October 2021, the median sale price of single-family homes was $525,000, according to data from the Massachusetts Association of Realtors. With closing costs of 2 to 5 percent of this adjusted home price, homebuyers could spend between $10,500 and $26,250.
Keep in mind that closing costs will fluctuate greatly depending on the price of your home, where you are located, and the complexity of the sale.
What is typically included in Massachusetts closing costs?
When it comes to understanding the bill breakdown of your closing costs, expenses start accounting for as soon as you apply for a mortgage loan. Here’s a closer look at some common charges you’ll find, including state-specific details every homebuyer should know.
Loan Origination Fees
Mortgage loans aren’t free: Whether you’re working with a bank or a mortgage broker, you’ll have to pay loan origination fees to set up your mortgage application. This includes everything from underwriting your loan to delivering pre-approval letters to finding your home and processing your financing.
Loan origination fees are typically around 0.5 percent to 1 percent of the loan amount.
Credit Report Fees
Before your lender decides you’re a responsible borrower, they’ll conduct a full credit check, which includes checking your credit report to see how you manage the debt. Expect your lender to pass on the cost of requesting your credit report. If more than one borrower is included in the mortgage application, you will need to double this cost.
Private Mortgage Insurance
If you don’t provide a 20 percent down payment, your lender will expect you to purchase private mortgage insurance, or PMI, in Massachusetts. PMI allows borrowers to qualify for a conventional loan, even if they make a down payment of 5 to 19.99 percent of their mortgage. Coverage protects your lender in the event of loan default.
This cost is not included in ClosingCorp’s closing cost expense count, but the PMI typically ranges from 0.25% to 2.25% of your outstanding loan balance, depending on your down payment amount and credit score.
Under Massachusetts law, all residential real estate closings are handled by an attorney, so you’ll need to hire one to manage the purchase of your home.
The attorney is responsible for much of the heavy lifting related to closing your home: you must draft and certify legal documents, order a title exam, verify that there are no unpaid taxes or charges on the property, and coordinate title insurance for you and your lender.
Before closing day, your attorney will also contact your lender to make sure your mortgage is processed on time. They will meet with you and the seller at the table on closing day to facilitate the transfer of the deed and release the funds held in a third-party escrow account to all relevant parties.
Legal fees can be expensive, but they are worth every penny. Buying your home is the biggest purchase you’ll make, so you’ll want to make sure your best interests are factored into all contracts and documentation.
Search for the title
When your closing attorney verifies the seller’s right to transfer the property, he or she will order a thorough search of the home’s title history. The last thing you want is to hand over your life savings to buy a home only to find yourself in a legal battle for ownership.
The title exam that takes place includes carefully studying historical records, including deeds and court records, to make sure that the land you are buying is not involved in property disputes, unpaid taxes, or judgments. You will have to pay for this step, whether you are buying a new construction or an existing house.
After the title search, the attorney will help you purchase the necessary title insurance for both you (homeowner’s policy) and your lender (lender’s policy). Title insurance protects both parties in the event of “title defects,” which is basically when something is overlooked during title search or there are claims on the property.
Buyers pay title insurance premiums in Massachusetts. This is a one-time expense, so insurance applies as long as you own the property you are about to purchase.
Before closing, your lender will send an outside appraiser to your new home to make sure it’s priced correctly. If you default on your mortgage, your lender needs to know that you can sell the property if you go into foreclosure to offset the outstanding balance.
The appraiser will evaluate the size and condition of the home, as well as its comparison to similarly priced homes in the community, to determine its fair market value.
Hire a professional home inspector to assess the health and safety of your potential new home, from foundation to roof and everything in between.
Pay close attention to your home inspector’s comments – they’ll point out any existing issues, as well as those that could arise in the coming years, such as the need to replace major appliances or an old roof. This is excellent information because you can negotiate with the seller any solution before finalizing the deal.
Transfer taxes are state and local government taxes that are paid when the seller transfers the home to the buyer. They could be listed as a deed tax or stamp duty on your closing cost bill.
In Massachusetts, the basic transfer tax rate is $2.28 for every $500 of property value. That’s a lot compared to other states. You may also find additional transfer taxes depending on the county you live in.
Sellers usually pay transfer taxes, but this is not set in stone. You and the seller can allocate this expense to you during negotiations.
Don’t forget the registration fee. Your municipal clerk’s office may charge a fee for recording the transfer of the deed in public records.
Massachusetts has some of the highest property taxes in the country at 1.15 percent, on average, of a property’s appraised fair market value, according to the Tax Foundation, a decades-old tax policy nonprofit. The rate will vary depending on the county you live in.
Property tax is billed quarterly, so be careful about due dates. This is a prepaid expense, meaning it must be paid in cash and cannot be included in your home financing.
Upon closing, you will need a paid homeowners insurance policy that is in effect throughout the year. Home insurance is a mandatory purchase before transferring your mortgage so you can buy your home. This is another prepaid expense that cannot be included in your home financing.
Home insurance is crucial to having it in place the moment you take possession because it covers any physical damage to your home caused by fire, wind, vandalism, or theft.
In Massachusetts, it’s worth checking if you need additional policies to cover severe cold weather, snowstorms, or flooding. Your lender or home insurance provider may require an elevation survey or certification to categorize your home’s flood risk and insurance requirements.
How can I reduce my closing costs in Massachusetts?
With expensive real estate and expensive closing costs, homebuyers in Massachusetts may be facing a surprise. But there are many ways to reduce closing costs. Here are some key strategies:
Closing cost assistance
Homebuyers should take advantage of Massachusetts homeowner assistance programs to significantly reduce their closing costs.
If this is your first time buying a home in Brockton, for example, you may qualify for up to $15,000 in financial assistance to help you with your home purchase. From Fall River to Holyoke to Medford, you can access many local programs that include assistance with down payment and closing costs.
Get your finances in shape
Your goal is to secure a low interest rate, which could save you thousands of dollars over the life of your mortgage. Therefore, it is worth getting your finances in order before heading to your mortgage broker’s office. Pay your debts, don’t miss any payments on your bills, and avoid applying for more credit.
Save as much as you can for the down payment as well. The closer you get to the 20 percent down payment threshold, the less you’ll have to pay in PMI.
Look for the best interest rate for your mortgage loan or any other service provider you need during the home buying process. Read reviews, check references from family and friends, and get quotes from service providers to find the best deal.
Concessions from the seller
During routine back-and-forth negotiations about selling the home, you may be able to reallocate some of your closing costs to the seller, especially if you’re in a buyer’s market.
For example, you could ask the seller to pay some or all of your closing costs if you offer to submit a full-price offer on your home. If you are buying a home for repair, you can ask the seller to pay the closing costs tab in exchange for repairs you may need to make.
If you’re an established customer with multiple loan products a day with your lender, you might consider asking them to skip expenses related to your mortgage application. The most obvious ones are often labeled as “junk fees,” such as flat rate fees, loan processing fees, and broker repayments.
Mortgages with no closing cost
With a “no closing cost” mortgage, your lender agrees to pay some or all of your closing costs while you pay a higher interest rate on your mortgage. Run some calculations before deciding that this is the best route for your end result. In the long run, this could cost you more money because of the increase in your interest rate.
Adding Closing Costs to Your Home Financing
Homebuyers who can’t scrape together the cash for closing costs may choose to transfer this expense to their mortgage loan. Instead of paying closing costs on closing day, the total is added to the monthly mortgage payments. This is a convenient way to pay closing costs upfront, but you’ll pay interest on closing costs over the life of the loan.