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.
|