Why closing costs vary so much from state to state

It's no secret that the price of a house depends a lot on its location. According to a new study by Bankrate.com, mortgage closing costs also vary widely from place to place.

In June, the personal finance website queried as many as 10 lenders in all 50 states and Washington, D.C., by getting online loan estimates for a $200,000 mortgage to buy a single-family home in a designated large city in each jurisdiction. The hypothetical loan was for a borrower with excellent credit (a FICO score of 740 or higher) and a 20 percent down payment.

What Bankrate found is that average closing costs amount to nearly $3,000 in some states and are a relative bargain in others.

Hawaii has the highest mortgage closing costs in the country ($2,655 on average), while Pennsylvania has the lowest ($1,837). The national average is $2,128, according to the study.

New York has the second-highest closing costs ($2,560), followed by North Carolina ($2,409), Delaware ($2,358), South Carolina ($2,322) and Connecticut ($2,313).

In addition to Pennsylvania, low-cost states include Wisconsin ($1,863), Kentucky ($1,874), South Dakota ($1,904), Oklahoma ($1,911) and Missouri ($1,926).

Not surprisingly, closing costs are higher in places where the cost of living is also steep, although that's not always the case, said Holden Lewis, a senior mortgage analyst at Bankrate.

The laws and customs governing the closing process in each state also affect costs. In some states, such as New York, attorneys handle closings, which involves paying legal fees, of course. In states where closing costs are relatively low, closings are often handled by title or escrow companies, according to Lewis.

Closing costs include both fees paid to lenders and a bevy of third-party fees for services, such as appraisals. Bankrate's figures include lender fees -- broadly defined as origination fees -- and third-party fees. They don't include a number of costs that vary widely on a case-by-case basis, including discount points, property taxes, title insurance and other items.

Given that closing costs can be substantial, Lewis said it behooves borrowers to shop around for a mortgage by applying with different lenders and comparing offers. Buyers now have a powerful tool they can use for that purpose, he noted.

Last October, the Consumer Financial Protection Bureau rolled out new disclosures and rules governing mortgage transactions. As part of the overhaul, the CFPB did away with the so-called Good Faith Estimate of loan costs -- a disclosure document that had been around for decades -- and replaced it with the more consumer-friendly Loan Estimate.

With the Good Faith Estimate, "it wasn't entirely clear what your loan costs would be and how to comparison shop," noted Lewis.

The Loan Estimate is binding and must be provided to prospective borrowers within three business days of completing a loan application. It outlines actual lender fees and estimated costs for third-party services. It also identifies which items, such as title or homeowner's insurance, consumers can shop around for.

The third page of the document details how much a borrower can expect to pay for a specific mortgage during the first five years of the loan, based on closing costs and the first 60 monthly payments. That information is particularly useful when it comes to comparing loan offers, said Lewis.

"It's a good idea to apply at more than one lender and get those loan estimates," he said. "The third page of the document is loaded with information that is useful when comparing different offers."