Austin TX Real Estate - Hill Country Austin Lakeway Homes for Sale: Real Estate - Austin TX - How Do Closing Costs Really Work?

Real Estate - Austin TX - How Do Closing Costs Really Work?

When you're an Austin TX home buyer, what does it mean to put closing costs into a contract? I hear all the time from sellers, "I'm not going to pay the buyers' closing costs! If they don't have money to buy my house, they shouldn't be buying it!!"  And buyers say, "I was told to make sure the sellers pay my closing costs. My friend did it so I want it too!"

Neither the sellers nor the buyers are looking at this closing costs thing in the right way.  When a buyer is buying a house, what seller in their right mind would pay a buyer to buy their house?  On the other side, what buyer in their right mind would think that a seller would actually pay for them to buy their house?  Those two thoughts are obsurd.

austin tx closing costs moneyWhat do you mean, Donna?  One of those things has to take place for it to work, right?  NO!

Here's what actually happens with closing costs; the buyer FINANCES their closing costs into their loan amount.  Huh?

For example, a buyer submits an offer to a seller for $200k with the seller paying $5k for closing costs.  That actually means the seller would be accepting a selling price of $195k.  If the seller were to accept these terms, it's the same thing as a buyer submitting an offer at $195k with no closing costs.  If a seller wants to counter to the buyer not wanting to accept anything less than a net of $200k, the sales price must then become $205k for the seller to give back the $5k to the buyer with the buyer financing those funds.

Why do buyers want to finance their closing costs instead of paying for them?  The biggest reason is because the buyer has money for the down payment but not for the closing costs, and they actually need the money.  The other reason?  Rates are low so borrowing is pretty cheap.  In today's market, with rates at about 5%, each $1k you finance, you'll change your payment by about $5 a month (nice rounded numbers).  If you roll $5000 into your financed amount, you will pay an extra $25 a month.

Why would you want to pay an extra $25 a month if you have the cash in pocket? Do the rest of the math... It takes 200 months to make up that $5000.  That's 16.67 years!!  How many people do you know that stay in their homes for 16+ years?  If you stay in your house the average time, around 6 years, you will have only paid $1800 of the $5k for closing costs. 

Yes, you're paying interest for 30 years (or 15 years) for this amount, but you also have a tax deduction for the interest paid. In the example above, look at how much money you keep in your pocket for a rainy day.  Instead of paying $5000 at closing, you can pay the $25 a month and have that cash for carpet, paint, appliances, furniture, or any emergency that comes up.

Cash in your pocket is more valuable when money is so cheap to borrow...

If you're an Austin TX Home Buyer and want an experienced agent to negotiate the terms of your new home purchase, please don't hesitate to contact me today!

**Are You Packed Yet?**

donna harris Realtor Austin TX blog

Donna Harris, REALTOR®
RE/MAX Austin Skyline
www.DonnaHomes.coma
Donna@DonnaHomes.com

Austin TX Real Estate and the surrounding areas of Lakeway, Bee Cave, West Lake Hills, Cedar Park, Round Rock, Spicewood, Circle-C, Steiner Ranch, and everywhere in between... Hill Country Austin TX Real Estate and beyond. Whether you're buying or selling an Austin home, I'll be with you every step of the way. 

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** #1 Agent in my Office for all of 2008 **

Copyright© 2011 By Donna Harris, All Rights Reserved. You may re-blog with links back to this post.
*Real Estate - Austin TX - How Do Closing Costs Really Work? * was first published on donnahomesblog.com.

Comment balloon 9 commentsDonna Harris • February 01 2011 01:48PM

Comments

Donna,  This is an excellent explanation.  Sometimes its hard to get either side to understand it clearly.  Just wondering....in a situation like this, do you calculate commission on the contract price or do you calculate on purchase price less seller paid closing costs?  I've done it both ways. 

Posted by Karen Poss, Realtor - 256-366-6292 - Search Florence Al Homes For Sale (Coldwell Banker Pinnacle Properties, Florence Alabama) almost 8 years ago

Such a simple concept and yet people are so confused.  I have to admit I am a little sneaky when it comes to helping the buyer obtain closing costs.  Negotiate the best possible deal for the buyer up front and then add in the closing costs with an amendment during the option.  Sometimes it is the only way for the seller to be able to get past the fact that they think they are paying the buyers' closing costs!

Posted by Elizabeth Arduain, Lubbock Texas Real Estate (The Diamond Group @ Keller Williams) almost 8 years ago

Donna, Great explanation on closing costs and what they actually equate to.  Stay warm!

Posted by Susan Brown (Keller Williams NE, Kingwood Texas (Humble & Atascocita too)) almost 8 years ago

Karen, I've done it both ways, but don't volunteer it. Commission on sales price is still a sales price with closing costs.

Elizabeth, That was popular before the recent changes. FHA will not accept an amendment like that anymore, so i just put it in my counter back instead of initial offer at times.

Susan, Thanks!

Posted by Donna Harris, Realtor,Mediator,Ombudsman,Property Tax Arbitrator (Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com) almost 8 years ago

and there are those situations where the buyer wants to "polish" the property with paint, carpet, kitchen cabinets, etc and want to use the cash on hand to accomplish other objectives -- really have trouble understanding why a seller would pass on a contract when the "net to seller" can come out the same --

Posted by Roy DuBose (Austin Distinction Realty) almost 8 years ago

Good stuff Donna. Well explained to your readers.

Posted by John Cannata, Texas Home Mortgage - Purchase or Refinance (214-728-0449 http://TexasLoanGuy.com) almost 8 years ago

Very well explained.  We typically have to explain this everytime to our first time home buyers.

Posted by Nick Good, www.TheGoodHomeTeam.com (The Good Home Team with Keller Williams Realty) almost 8 years ago

Roy, I just recognized your name from another forum...

John, Thanks!

Nick, Yes, and every single seller as well!

Posted by Donna Harris, Realtor,Mediator,Ombudsman,Property Tax Arbitrator (Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com) almost 8 years ago

WOW! Great way of explaining this whole concept! I will certainly make sure to use this the next time my buyers need fees paid! Perhaps with First time home buyers or even Seniors moving into a manufactured home!!!

Posted by Heather Russo, SRES , REALTOR, Kerrville, Texas Homes for Sale (Keller Williams Realty - Kerrville) almost 8 years ago

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