You’ve found your dream home, secured a loan with a competitive interest rate, and saved a down payment. But before getting the keys to your new home, you have one more major financial hurdle: closing costs.
Closing costs are all the administrative and legal services you’ll need to pay during the homebuying journey. It takes a village to help you buy a new home – you’ve got your lender, property appraiser, home inspector, insurance provider, and the taxman, for starters. For convenience’s sake, you’ll pay these costs in a lump sum on closing day, alongside your down payment. Typically, closing costs amount to 2-5 percent of the home’s purchase price.
If you’re buying a new home in Rhode Island, NewHomeSource has created the following guide on how much you should be saving, a breakdown of what’s generally included, and how you can potentially lower these costs.
How Much are Closing Costs in Rhode Island?
Closing costs in Rhode Island are, on average, $1,968 for a home loan of $287,310, according to a 2021 report by ClosingCorp, which researches residential real estate data. That makes up 0.68 percent of the home price. The Ocean State’s closing costs are affordable compared to the rest of the country, ranking as the 13th cheapest. For comparison’s sake, the national average is $6,087.
But homebuyers in Rhode Island should save more than these initial estimates. That’s because ClosingCorp’s data excludes two key costs: loan origination fees (if you’re applying for a mortgage) and private mortgage insurance, which you’ll need to buy if your down payment is less than 20 percent. Combined, these expenses can easily add up to thousands.
Home values are also “breaking records” in Rhode Island, which will drive up closing costs, too: The median sales price for a single-family home in 2021 was $365,000, a 14.3 percent increase from the prior year, according to data from the Rhode Island Association of Realtors.
Bear in mind, your total closing costs will vary depending on the price of your home, its location, and the complexity of the sale.
What’s Typically Included in Rhode Island’s Closing Costs?
The easiest way homebuyers can keep track of closing costs is by grouping them into three categories: mortgage-related, property-related, and those that recur annually.
Each state also has its own set of regulations you’ll need to follow, from hiring a lawyer to paying for real estate transfer taxes. Here’s what to expect in Rhode Island.
Unless you’re buying your new home with cash, you’ll need a mortgage. These are the closing fees you’ll incur from your lender, along with state protocol for hiring an attorney.
Loan Origination Fees
Right off the bat, you’ll be charged about 0.5 percent to 1 percent of your total mortgage to set up your home loan. A mortgage doesn’t come for free – your lender will charge you this fee for all the paperwork involved in preparing your home loan, from the application and underwrite, to providing preapproval letters and processing the funding at closing.
Credit Report Fee
Whether you’re applying for a credit card, a mortgage, or a personal loan, lenders must check your credit to determine if you’re a responsible borrower. They’ll pull your credit report with the various bureaus to have an in-depth look at how well you manage debt, but they’ll pass along the charges incurred to you.
If there’s more than one borrower on the home loan application, double this cost.
Private Mortgage Insurance
If you aren’t providing at least a 20 percent down payment, your lender will expect you to buy private mortgage insurance or PMI. This allows borrowers to qualify for a conventional loan if they put down five to 19.99 percent of their mortgage. While you’re paying for the insurance, the coverage is for your lender in case of default.
PMI typically ranges from 0.25 percent to 2.25 percent of the loan, depending on the size of your down payment and credit score. Once you hit 20 percent equity in your home, you won’t be required to carry PMI.
Rhode Island is one of a dozen or so states that require homebuyers to have legal representation during the closing process. That means you’ll need to hire a lawyer to specifically examine the title and review the deed to the property.
They’re also essential in drafting your purchase agreement, checking your mortgage contract, and ensuring your insurance policies are ironclad.
Ultimately, the cost for hiring a real estate attorney in Rhode Island will vary, depending on the home’s location, what services you require, and the complexity of the sale.
While an attorney may be dealing with the legal aspects of your closing, you may also decide to hire a title company or escrow agent to help with getting to closing day without any hiccups.
In a nutshell, your title company will guide you through the checklist of things you need to complete by closing. They’ll also set up an escrow account to hold your various deposits, like your down payment, and property taxes. With a third-party escrow account, your seller and any other vendors won’t get paid until all parties meet their obligations on the home sale and the contract is finalized.
Before you make the single biggest purchase of your life, you and your lender will put your potential new home to the test. Here are key property-related fees you’ll see on your closing costs tab:
Your lawyer will arrange for a title search to be conducted on your new home to make sure you’re buying a property that’s free and clear for you to own.
A title examination involves searching historical title documents like deeds, court records, and property indexes to ensure the land isn’t tied up in litigation, unpaid taxes, or other issues you’d inherit once you take ownership.
This is an expense homebuyers must pay, whether you’re buying a new build or an existing home. It’s your lawyer’s job to examine the title search results and determine whether you’re in the clear to proceed with the purchase.
To guard anything that’s overlooked in the title search, homebuyers must buy title insurance for both you and your lender, via owner’s and lender’s title insurance policies. It’s one of several insurance policies — alongside homeowner’s insurance and PMI — that you’ll need to purchase before your lender funds the loan.
Title insurance covers you and your lender in case of “defects in title,” or if something is missed during the initial title search. If your ownership is questioned, the insurance will cover court courts and related fees. It’s a one-time expense that remains in effect until you sell the property.
In Rhode Island, homebuyers typically pay for both policies, along with the title search.
Before your lender agrees to fund your home loan, they’ll send a third-party appraiser to the property to make sure it’s priced at the right value. This step is a safeguard for your lender – if you default on your home loan and your property goes into foreclosure, your lender needs to know it can resell the home and recoup its costs.
The appraiser will evaluate the home’s size, features, and condition, as well as how it stacks up to homes priced similarly in the community, to determine its fair market value.
While the appraiser assesses the property’s market value, a home inspector zeroes in on the health and safety of your potential new home. This step is just as crucial – a home inspector will examine everything from the foundation to the roof, and the condition of major appliances, the plumbing, HVAC systems, electrical work, and every little detail in between.
Take stock of your home inspector’s feedback. Not only will they flag existing issues, but they can alert you to problems that could surface in the coming years. This is important intel to bring back to your seller to adjust the price or make repairs before finalizing the deal.
Real Estate Transfer Tax
Whenever real estate changes hands, buyers and sellers need to account for a transfer tax during closing. It can also be called a deed tax, mortgage registry, or stamp tax.
Real estate transfer taxes are pricy in Rhode Island, to the tune of $2.30 for every $500 of property value. If the home you’re buying is $800,000 or more, you’ll pay another $2.30 for anything above that threshold, according to the Rhode Island Department of Revenue.
If you’re buying a mobile or manufactured home, the transfer tax is $1.40 for every $500 of property value.
It’s customary in Rhode Island for the seller to pick up this expense. But this rule isn’t set in stone – you may decide to cover this cost during negotiations with your seller.
From monthly mortgage payments to utility bills and seasonal maintenance, homeownership is an ongoing investment. Your closing costs will include a handful of fees that you’ll need to start paying annually.
In Rhode Island, homeowners pay, on average,1.53 percent of their home’s assessed market value in property taxes, according to the Tax Foundation, a decades-old tax policy non-profit. It’s one of the highest property tax rates in the country.
Property taxes are a prepaid expense, meaning they need to be paid at closing and can’t be rolled into your home financing. As part of your closing costs, you’ll need to pay for the first six to 12 months.
This is a mandatory purchase that you must make before your lender transfers your mortgage funds. A standard policy pays for repairs when there’s a fire, vandalism, or theft. You may want to buy extended policies for extreme weather events, or if you’re keeping expensive heirlooms, jewelry, or art under your roof.
Like property taxes, this is a prepaid expense, meaning it must be paid in full at closing and can’t be rolled into the home financing.
Roughly 44 percent of Rhode Island homeowners are part of a homeowner’s association (HOA). With these stats, there’s a good chance you’ll be on the hook for this recurring expense.
HOA fees typically cover the cost of community amenities, such as fitness centers, pools, and community parks. They also may cover expenses to keep your neighborhood running, from trash removal to security.
Be sure to ask about HOA fees up front while you’re house hunting.
How Can I Lower my Closing Costs in Rhode Island?
If you’re wondering how you’ll come up with the cash to close on your home, here’s a rundown of key strategies that could save you some money.
Closing Cost Assistance
Look into Rhode Island’s homeownership assistance programs, which can be a great way to reduce closing costs – from low-interest home loans to down payment and closing assistance.
Start by looking into statewide programs on offer from Rhode Island Housing. One of its key programs is the 10kDPA, which provides $10,000 in down payment and closing cost assistance in the form of a forgivable loan to eligible homebuyers. The loan accrues no interest and requires no monthly payments, as long as the home is your primary residence. RIHousing also has an Extra Assistance Program, which grants up to six percent of the purchase price, or $12,000, towards down payment and closing cost expenses.
Check with your local county or city offices, too – from Cranston to Providence; there are regional homeownership programs with closing cost assistance up for grabs.
Focus on your Finances
Get your financial ducks in a row before you start shopping for a home loan. Your goal is to show lenders you’re a low-risk borrower so you can secure a lower interest rate. This strategy could save you thousands over the lifetime of your mortgage.
Make sure you have a great credit score, don’t miss any due dates on existing loans, and pay down your debts as much as possible. Save as much as you can for a down payment, too. The closer you get to the 20 percent threshold, the less you’ll have to pay in PMI.
Practice your hand at the art of negotiation during the homebuying process. You may be able to shift some – or all – of your closing costs to your seller, especially if you’re already in a buyer’s market. You could, for example, submit a full-price offer with a caveat that the seller pays your entire closing costs tab. Or, if you’re buying a fixer-upper, you could ask the seller to pay for your closing costs to free up cash for repairs.
Whether you’re shopping for a title company, a home inspector, or a mortgage provider, shop around and compare prices between service providers. Read through reviews, check out referrals from friends and family, and review providers’ accreditations. With a shortlist in hand, obtain quotes from a few providers to make sure you’re getting the best deal.
Negotiate Lender Fees
If you have a longstanding, established relationship with your lender, you may have some wiggle room with loan setup fees.
You could ask the lender to omit certain expenses, such as rate lock fees, loan processing fees, or broker rebates. If that doesn’t work, you could also ask to stagger these expenses, so they’re paid in stages instead of all at once.
Add Closing Costs to your Home Financing
Homebuyers may have the option to roll closing costs into the loan. Instead of paying them at closing, the amount will be added to your monthly mortgage payments.
While it’s a convenient alternative to paying this upfront, you will end up paying interest on your closing costs across the life of your loan.
Another solution you may be able to pitch to your lender is a “no-closing-cost” mortgage. In this scenario, your lender agrees to pay for part — or all — of your closing costs. In turn, you pay a higher interest rate on your mortgage.
Run some calculations before you decide if this is the best route to take. In the long run, this option could cost you more money because of the bump in your interest rate.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.