Closing Costs Explained
(Home Loan Financing for All Situations)
Closing can be one of the most confusing aspects of buying a
home or refinancing a loan. The process begins with your bid,
the sales agreement and your loan application. It ends the day
of closing when all of the necessary documents are reviewed and
signed, and corresponding fees are paid. Usually, it takes
between 60 to 90 days to complete the closing process.
Several individuals are involved in the closing process in
addition to you and the seller, including attorneys and
mortgage and title company representatives. Your attorney will
coordinate with each participant to choose a closing date. Keep
in mind that it takes time to gather all of the documentation,
and if the paperwork is not completed on schedule, it is
possible that the closing date can change. This uncertainty can
be particularly stressful for buyers who are also selling a
home, since the closing date generally dictates moving
arrangements.
For your closing, you will need to be prepared with photo
proof of identification for each buyer, your new homeowner's
policy, as well as various other documents which your attorney
will advise you of. And, don't forget your checkbook! The
closing is where most fees are settled.
Closing Costs
Real estate practices and closing costs vary widely in
different areas of the country, and from lender to lender.
However, buyers and sellers are free to negotiate certain fees.
It's best to do your research before you make any offers, so
you're in the best position to negotiate with the seller. In
most states, you can also cut costs by shopping around for
providers of settlement services.
Generally, you can plan to spend an additional 3 to 5
percent of the loan amount in settlement expenses (for example,
$3,000 to $5,000 on a $100,000 mortgage). In higher-tax areas,
5 to 6 percent is more realistic. The exact figure depends upon
the location of the property you are purchasing.
Ask Your Lender for an Estimate of Closing
Costs
Experienced loan officers will provide a rough estimate of
closing expenses before you apply for your loan to make it
easier for you to shop around. Once you apply for your loan,
The Real Estate Settlement Procedures Act (RESPA) requires your
lender to provide a Good Faith Estimate of all closing costs
within three business days of your application. The lender is
also required, under the Truth in Lending Act, to provide a
disclosure estimating the costs of the loan you applied for,
including your total finance charge and the Annual Percentage
Rate (APR), within the same three days. Finally, you will
receive a statement of actual closing costs from your lender at
or before settlement.
Closing costs fall into three general categories: loan
costs, title fees and government fees. Below is an explanation
of each category and specific fees you can expect to pay. Cost
estimates and ranges are provided for your planning purposes
only. Your actual closing costs will vary depending on the
property you are purchasing, the area in which you live and the
service providers involved.
Loan Costs
The fees required
to obtain your mortgage may include:
* Application Fee & Credit Report
Imposed by your lender, the application fee covers the initial
costs of processing your loan request, and usually includes a
credit report check. The application fee with a credit report
can range from $400 to $525. If it is handled separately, the
cost for your credit report will be about $75 to $150. If you
are self employed, you will also need a business report that
costs between $50 and $100.
* Appraisal Fee
This fee covers an independent appraisal of the home you want
to purchase. The lender requires this estimate of the market
value of the house in order to make the loan. The appraisal fee
varies depending on the purchase price and size of the home.
For a $100,000 home, the minimum fee would be approximately
$275.00.
* Attorney Fees
Settlements are conducted by lending institutions, title
insurance companies, escrow companies, real estate brokers
and/or attorneys. In most cases, whoever conducts the
settlement is providing a service to the lender. You may be
required to pay for these legal services. You should also
retain you own attorney to represent you at all stages of the
transaction. Attorney fees are usually based upon the purchase
price of the home and the complexity of the sale. Attorney fees
can range anywhere from $600 to $1,000 and up.
* Documentation Fees
Some lenders charge miscellaneous fees for various services,
such as underwriting, processing and documentation preparation,
which usually total under 1 percent of the loan amount.
* Home & Pest Inspections
A home inspection by a qualified engineer and pest inspection
by a pest control specialist offer assurance that the home you
are purchasing is structurally sound and free of termites and
any related damage. The costs for these services vary depending
upon the location and size of the property, and the
professionals you choose.
* Homeowner's & Hazard Insurance
Homeowner's and hazard insurance offer protection against
physical damage to your new home by fire, wind, vandalism and
other causes. Most states require that the annual premium on
your homeowner's insurance be paid in advance and put into
effect at closing. Prices for homeowner's insurance vary
depending upon the value of the home, the location and the
insurance agency. For example, homeowner's insurance for a
$200,000 property could cost between $600 to $700 annually.
* Interim Interest or Daily Rate of Interest
This cost is based upon your closing date and covers loan
interest from the day you close through the end of the month.
Therefore, it can range from 0-30 days' interest, payable to
the lender.
* Loan Origination Fees & Discount Points
The origination fee is charged for the lender's work in
evaluating and preparing your mortgage loan. Discount points
are prepaid finance charges imposed by the lender at closing.
Essentially, paying points is a means for the borrower to pay
down the interest rate. Paying points can save thousands over
the long term, so if you plan to be in your new home five years
or longer and you have the cash up front, it's certainly an
option to consider. One point equals one percent of the loan
amount. For example, one point on a $75,000 loan would be $750.
In some cases - especially with refinances - the points can be
financed by adding them to the loan amount.
* Mortgage Insurance (PMI)
Buyers who make down payments that equal less than 20 percent
of the value of the house may be required by lenders and, in
some states, by law to take out mortgage insurance. The policy
covers the lender's risk in the event the buyer fails to make
loan payments. Premiums are usually paid annually from an
escrow or reserve account, or in a lump sum at closing. A buyer
whose mortgage is insured by FHA or guaranteed by VA will have
to pay FHA mortgage insurance premiums or VA guarantee
fees.
* Survey
At a minimum, the lender will require an independent
verification from a surveying firm that no additional
structures have been added to the lot since the last survey was
conducted on the property. The lender may request a complete
survey to ensure that the house and other structures on the
property meet legal codes and regulations. Depending on the
size of the property and the state you live in, surveys can
cost between $250 to $450.
* Title Fees
In order to purchase a property, you must establish the
seller's ownership and transfer ownership from seller to buyer.
The following fees are required by a title search company to
complete this process:
* Document Preparation Fee
This is usually a flat fee paid to the title company which can
range from $50 to $200.
* Title Search & Title Insurance
It is necessary to prove to the lender that the seller owns the
property you wish to purchase in order to get a loan. The title
search provides this proof. The title search involves reviewing
public records in local government offices, including recorders
of deeds, county courts, tax assessors and surveyors. Records
of deaths, divorces, court judgments, liens and contests over
wills (all of which can affect ownership rights) must also be
examined. The title search assures you and your lender that
there are no claims against the property. The cost for a title
search is based upon the purchase price, and may cost
approximately $300 to $600.
In addition to the title search, title insurance protects
you and the lender from an error in the title search. Such an
error could mean that the lending institution loaned you money
to buy a house from someone who didn't own it in the first
place. Lenders' title insurance is approximately .2 percent to
.5 percent of the loan amount, paid by the purchaser. Owner's
title insurance protects you from title search errors, and
usually ranges between .3 percent and .6 percent of the
purchase price of the home.
* Government Fees
Government-imposed fees are usually the most costly fees you
will incur at closing. These include city, county and state
transfer taxes, recording fees and prepaid property taxes.
* Recording Fee
This fee, which is paid to the title company, involves
recording the transfer of title with the county clerk's office.
Recording fees vary from state to state and county to county,
however, each county sets a fixed price per page which is
usually about $50.
* Taxes
Most states require that four to eight months' taxes be
collected at closing and held in an escrow account. An escrow
account is a reserve account set up by your lender in which you
deposit enough money to cover the first few months of mortgage
insurance, hazard insurance and property taxes. The purpose of
the escrow account is to ensure that sufficient funds are
available to cover these expenses once you've purchased your
home.
Helpful Hints: Questions to Ask Your
Lender
Finding the right loan takes time, and the
research can be complicated. Be sure to ask lenders any
questions that arise as you explore your options and get the
answers before you apply for your loan.
Does the application fee include the credit report, or is
that a separate fee?
Some lenders include the credit report in the application fee,
while others charge for the credit report separately. Find out
how your lender handles it to avoid surprises during the
application process.
Approximately how much should I factor in for closing
fees?
Your lender is required by law to provide a Good Faith Estimate
when you apply for your loan. However, experienced loan
officers will gladly provide a rough estimate of closing
expenses before you apply to make it easier for you to compare
their loan against other options you may be considering.
How long have you been in the mortgage business?
Experienced loan officers will guide you through the
application process and will know how to present your
background and financial information to help you get
approved.
Can I get pre-approved?
Many lenders can "pre-approve" you, which qualifies you for a
loan by checking your income, credit and other financial data.
The pre-approval will also indicate the price of a home you are
qualified to buy. By getting pre-approved, you learn the price
range you can afford and the loan amount you qualify for. Also,
a lot of the initial legwork is done in advance and you'll be
better prepared once you find the home you wish to
purchase.
Can I lock into the interest rate when I want to, or is
the offer time limited?
Since interest rates can change daily, there may be a time
period in which you must lock in to ensure the interest rate
you want. Many lenders will give you the option to lock in
anytime. Find out when you must lock in before you make any
commitments.
Will I be penalized if I pre-pay my mortgage?
Make sure that you can pre-pay your loan without incurring a
penalty. You may not plan to make additional payments in the
beginning, but remember that your financial situation can
change during the term of your loan. The option to pre-pay can
save you thousands over time, providing you aren't charged a
pre-payment penalty
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