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Understanding Closing Costs
One of the most common mistakes by new home buyers is underestimating the amount
of cash (closing costs) needed to move into the home. Most people wrongly assume
all they need is the down payment. Unfortunately, they do not consider the hard
and soft closing costs of the services required throughout the home buying and mortgage
qualifying process. These items can quickly add up to a substantial amount, and if
not planned for, ruin the transaction.
While each deal is unique, home buyers should be aware of and
plan for the following cash outlay items when purchasing a
closing costs are
those one time costs associated with the home buying and mortgage qualifying
process. These closing costs only occur once at the close of
the transaction. Typical non-recurring closing costs include
Mortgage Points, Title, Escrow, Appraisal, Credit Report, Document
Preparation, Property Inspection, Termite Inspection, Underwriting and
other miscellaneous charges.
title and escrow, these charges are fixed and will not vary with the
size of the transaction. For a typical $200,000 purchase price,
you should expect to spend between $1,700 and $2,000 for non-recurring
closing costs PLUS any mortgage points you choose to
- 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
- Documentation Fees
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.
- Loan Origination Fees & Discount Points
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.
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
- 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.
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.
Recurring Closing Costs
As the name implies, Recurring Closing Costs are those costs of homeownership that
will recur over time. While there will be an initial, upfront charge
when the transaction closes, these items can be expected to continue in
Typical recurring closing costs include
Prepaid Interest on the mortgage, Homeowners Insurance Policy, Real
Estate Tax & Homeowners Fee Proration, and Mortgage Insurance
Recurring Closing Costs vary widely depending on the size
and timing of the transaction. Typical costs on a $200,000 purchase with a $180,000
loan would run between $500 and $2,500.
- 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.
- Mortgage Insurance (PMI)
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.
In California, lenders are allowed by law to require you to
set up an impound account if you put less than 20% as a downpayment. Most will only
require it if you put 5% or less down. An impound account is an account that is set
up with the lender to pay real estate taxes, home owners insurance and mortgage insurance.
The account is initially funded with up to 8 months of taxes, 14 months of
homeowners insurance and 14 months of mortgage insurance. You would then pay an
amount into your account each month with your house payment equal to 1/12 of these
charges. In theory, the lender would always have 6 months reserve with which
to pay your taxes and insurance.
The amount of the impound account varies widely by the size
and timing of the transaction and by the type of insurance you obtain. On a typical
$200,000 purchase with a $180,000 loan, impounds could range from $1,000 to $4,000.
Move In Costs
Move in costs are the closing costs associated with moving your
belongings and setting up your new household. Typical move in costs include moving
vans, moving services, window coverings, painters, carpet cleaning, deposits for utilities
and new household items.
It is very important that you feel you have a comfortable
cash reserve upon moving into your new home. Most lenders will require you to have
between 2 and 6 months of house payments in liquid reserves when you close your
Summary of Cash to Close
Below is a "typical" list of cash items to close
on the purchase of a $200,000 home with a 10% downpayment. The mortgage is a 9.00%
30 Year Fixed rate mortgage that costs 1.0 points.
|Non Recurring Closing Costs
|Mortgage Points (1.00%)
|Recurring Closing Costs
|Move in costs
|Cash Reserves (4 months)
|TOTAL MOVE IN CASH
As you can see, the costs can quickly add up. If they
are not understood and planned for, they can ruin your dream of home ownership.
Minimizing Cash to Close
There are many "tricks of the trade" used to
minimize the bite of cash to close. Typical tricks include seller paid credits to
the buyer, using mortgage service release premiums to pay for closing costs, timing the
close properly and utilizing special home buyer programs.
It is VERY important that you choose highly experienced
mortgage and real estate professionals when you are purchasing a home. A skilled
mortgage professional can structure your transaction so as to minimize the above items.
In many cases, you can limit your cash outlay to the downpayment plus some
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