Allan C. Brown Realtor®

 

 

 

 

 

 

 

 

 

 

Closing Costs

For many homebuyers, as they are looking at and considering homes and evaluating their budgets, closing costs are often considered only as an after-thought (or worse, not considered at all). Since closing costs can add up to as much (or more) than the down payment, these costs will need to be an important consideration as you determine what your total cash outlay is going to be at settlement time.

What Are Closing Costs?

Closing (or settlement) costs are those charges and fees associated with buying a home that are in addition tothe down payment. They include such items as points, deed transfer fees, professional fees, homeowner’sinsurance costs, taxes, etc. Although there are occasions where some closing costs can be rolled into the loan amount (and the monthly mortgage payment) the majority must be paid in cash at the closing or settlement. In determining the amount of closing costs to expect, there are a number of variables involved including the type of mortgage loan, how many points are with the loan, state laws, and what is customary for the buyer to pay. As a very rough rule of thumb, you can figure that closing costs will amount to 3-6% of the selling price of the home.

Common Buyer Closing Costs

The following are some examples of common costs that are associated with closing (and where the moneygoes!) Remember, these can vary a good bit by the factors mentioned above--type of loan, where the property is located and what is customary for the buyer to pay for in your area.

Points - Each point, which is a form of up-front interest, is equal to 1% of the loan amount. For example, a $100,000 loan with 2 points would mean $2000 would be needed at closing. These may include origination fee points as well as discount points. (PAID TO: Lender)
Loan Processing Fee - (PAID TO: Lender)
Loan Document Fee - (PAID TO: Lender)
Appraisal Fee - (PAID TO: Lender - Usually paid at time of application)
Credit Report Fee - (PAID TO: Lender - Usually paid at time of application)
Survey - (PAID TO: Surveyor)
Attorney or Closing Agent Fee - (PAID TO: Closing Agent)
Private Mortgage Insurance [PMI] - (PAID TO: Lender)
Pre-Paid Homeowners Insurance - (PAID TO: Insurance Company - Usually 1 year pre-paid)
Real Estate Taxes - (PAID TO: Local government - Pro-rated)
Interest until 1st Day of the Month - (PAID TO: Lender)
Deed Transfer/ Mortgage Recording Fees - (PAID TO: Local government)
Other Recording Fees - (PAID TO: Local government)
Title Insurance - (PAID TO: Title Insurance Company)
* There could be more--or less--closing costs for which you may be responsible.

Good Faith Estimate

Shortly after you apply for a mortgage, your lender will supply you with a "Good Faith Estimate" of your closing costs. This is an approximation of all the costs that will be associated with your closing. The key word here is "estimate" since your actual closing costs may vary a bit--either higher or lower-- from what is quoted. A good faith estimate is a reasonably close guide to the cash you will need, but it is not a guaranteed document. The actual amount will be disclosed on your final settlement statement, available a few days prior to closing.

Can (and Will) a Seller Pay Your Closing Costs?

A seller is not required to pay ANY of a buyer's closing costs. Although there may be certain types of mortgages that will make some of the buyer's closing cost the responsibility of the seller (for example, 1 point) the seller is not obliged to accept such an offer. They can wait for another buyer who does not need closing costs paid.

Whether or not a seller will help with closing costs is determined, to a large degree, by the strength or weakness of the Real Estate market in the area. If you are interested in a correctly priced home in an active market, it is less likely that a seller will pay any closing costs as opposed to a slower market where potential buyers are more scarce (making the home more difficult to sell).

Keeping Closing Costs at a Minimum

Most closing costs, by their nature, are locked in stone. For example, if all property transfers in your area are subject to a transfer tax payable by the new owner of the property, you will need to pay the tax. Homeowners Insurance is required on all properties in which a mortgage is involved. The closing Agent or Attorney will charge a fee for their services.

* If you are low in cash, you may want to consider some of the following hints for reducing your overall expenses at closing time.

1) Interest rates and points directly affect each other. The less points with a loan, the higher the interest rate and the more points, the lower the interest rate. So, it may make sense to take a higher rate (with less points) if you want to reduce the amount needed at closing.

2) When comparing lenders, be sure to compare their fees as well as interest rates and points. These fees can add up at closing time.

3) Since homeowners insurance is paid up front (generally for at least 1 year) shopping for the best deal can save money.

4) Real Estate Agent and Attorney fees can vary, so you will want to make comparisons of their charges.

In Summary

Although you don't have an option of whether or not to pay closing costs (for certain, at least some WILL be on your closing statement!) you can, with some preparation, minimize the impact.

 

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