Closing Costs Basics

What happens at closing?

At closing, you become the official owner of the acquired property. Officially transferring the title to you may involved you, the seller, the real estate agent, representatives from the escrow firm and several clerks, secretaries and other staff. Closing may take several hours. It involves signing all the forms and contracts that signifies the transfer of ownership. Depending on the contingency clauses stated in the purchase offer, there might be escrow accounts that may need to be setup. Ensure that you have enough time for the closing; you don’t want to rush this.

Before your close on the property, make sure that you’ve done a final inspection or walkthrough. This is to ensure any repairs you requested are down and that the items that are to be retained are still in the house. This is also the time when you can call to attention any concerns you see with the property.

In most areas, the escrow firm, which the appropriate cashiers’ checks, handles the settlement. Then, this firm will be the one that makes the necessary disbursements. Afterwards, the real estate agent or another escrow firm representative will deliver the check to the seller and the house keys to you.

Statutory Costs and Taxes

The expenses you are required to pay to the state and local agencies are called Statutory Costs. Statutory costs are paid out even if you paid in full and didn’t avail of a mortgage. The amount of statutory costs depends on what state and country you bought the property. Statutory costs are broken down as follows:

–       Transfer taxes are paid when you transfer the title and deed from the seller to you. Paying transfer taxes will depend on the localities; some require it, some don’t.

–       Recording fees for deeds are paid for the country clerk. The country clerk is the one that records the deed, the mortgage note and updates the property tax billing. This is needed for the property purchase and refinance transactions.

–       Pro-rated taxes are usually based on the number of days that home ownership transpired. Payment for this is usually split between you and the seller because they are paid at different times of the year. In California, the mello roos taxes are based on the city and county. On the other hand, some states have their own taxes that differ by locale. For the state taxes, if the taxes are due in October and your closing is in August, you would need to pay 2 months worth of taxes, while the seller will have to pay for the other 10 months.

–       Impound Account ensures that the insurance and tax bills are collected. However, impound accounts are only required depending on the requirements of the loan. Not all creditors require them, but a change in the rate may occur if no impound account is in place. If you are not required to set up an impound account, it is highly recommended to set up a special account as assurance that you’ll have funds when a “lump-sum” tax and insurance bills arrive.

–       Other state and local fees may include mortgage taxes and other local fees. The state or local authorities may require the payment of these

Third-Party Closing Costs are required even if you paid in full for the property. Benefactors of these are the appraisers, title insurance companies, and escrow companies. Below you’ll find a list of examples of third-party costs.

–       Attorney fees: You may be required to have an attorney when you purchase a property. However, attorney requirements vary by state. Though most states don’t require attorneys for property acquirement transaction. If you are required to have a lawyer, a percentage of the selling price, like around one percent, may be charged. Some real estate lawyers may work for a flat rate or on an hourly basis. If you don’t know any real estate lawyers, your realtor should be able to recommend you to one.

–       Title search costs: Title search are done to verify the owner of the property. This is to ensure that the seller of the house you’re buying from is actually the owner. Usually, the title company or your lawyer may arrange for the title search. This ensures that there will be no hindrances, such as liens or lawsuits, when the property is purchased.

–       Home owner’s insurance: Sometimes called a hazard insurance, home owner’s insurance are usually paid when you purchase a home. This insures the property from damages. Lenders usually require that you prepay the first year’s premium of the homeowner’s insurance.

–       Real estate agent’s sales commission: The real estate agent gets his or her commission from the seller. If one of the agent lists the property then another one was able to sell it, the commission is usually split between the two. Most of the time, commissions are negotiable between the seller and the agent.

Finance and Lender Charges

Finance charges collected by mortgage lenders are usually tied with closing costs. The amount of the charges you’ll pay will depend on the lender. Below are the following charges you may have to pay to your creditor.

–       Origination or application fees: Mortgage companies usually charge a small fee upon the processing of the mortgage application. This may be a flat amount or a percentage of the mortgage. Our company, on the other hand, does not charge application fees. If you are buying down your rate, then, you may be able to pay in points.

Inspections (termite, water test): These inspections are necessary when you are filing for mortgage. In most cases, inspection for termites is required. Furthermore, there are creditors who will require a water test to ensure that the water system is working and is capable of supplying water to the whole house. Water testing is usually a quantity test and not a water quality test. If you want to test for the water quality, that may be another cost.

Points: One point is computed by one percent of the loan amount you borrowed. The point system can assist you in buying down the rate and avail of a lower one. Usually, points are tax deductible. However, the deductibility of taxes applies differently to second homes. You may have to seek for the advice of a tax advisor to clarify the point system to you.

Document preparation fees: When you apply for a loan, you will be given various documents that range from the application to the acceptance to the closing papers. The preparation for these documents does cost a certain amount and this fee covers that cost.

Preparation of amortization schedule: There was a time when this was needed. However, it is not common to charge for this one.

Land Survey: To ensure that no one has trespassed on the land, there are creditors that will require doing a land survey. The survey is also done to verify the improvements done to the property. However, this is not done all the time. In most cases, appraisal is enough.

Appraisals: Appraisals are a way for the lender to know and verify the value of the home. The value of the home is usually based on the recent sales of similar properties in the area.

Credit report: To mitigate the risk of lending you money, creditors acquire a report of your credit. Your credit report is required when you are going to purchase and refinance properties via a lending company. Checking your credit score is a way for your lender to determine whether you can pay them back.

Private Mortgage Insurance: Your creditor will most likely require you to purchase a private mortgage insurance (PMI) if your down payment is less than 20% of the loan amount. This is one way for your lender to ensure that they get paid if you default on the loan. Your private mortgage insurance will continue your payments until your principal and your down payment equal to 20% of the selling price. They may continue until the life of the loan. Thus, you are faced with multiple costs. Our company, on the other hand, is offering other solutions that don’t require private mortgage insurance.

–  Release fees: If the seller of property worked with a contractor, who placed a lien on the property and expect to be paid from the earnings of the sale, then, there may be several charges involve. Though the seller usually shoulders this cost, this amount may be added to the purchase price.

Escrow Account: An escrow account is a fund that is usually set up for the purpose of setting aside monies for the payment of taxes, homeowner’s insurance, and the PMI. Instead of making one big payment to different accounts at different times, you can just set aside monies every month in your escrow account, then, once your tax and insurance bills come, you can pay them via the escrow account.

Prepaid Interest: After the closing, your first mortgage payment begins after 6 to 8 weeks. For example, you close the sale in August, then your first mortgage payment is due in October; the payment in October will cover the amount for the month of September. On the other hand, the interest costs begins immediately after the closing. Creditors usually take into account your interest by the fraction of the month in which you close. Take for example, you close on August 25, you would then owe your creditor interest for 6 days. There are rare cases when your interest is already due at closing. During a refinance transaction, you will also owe money to your previous lender. Based from the previous example, you would have an obligation of 25 days to your previous creditor. Take note, that in a refinance, you are paying for about a month’s worth of interest in the transaction every single time you refinance. This is offset by gap in the first month where you will not make a mortgage payment immediately after refinancing.

RSS feed for comments on this post. TrackBack URI

Leave a Reply