Closing costs. We use this term to lump together all the different sums of money that are necessary at the end of a real estate transaction for a home sold in Bethesda, or anywhere in the surrounding area. Closing costs can add up to an additional 3% in funds you'll need to bring to closing so it's important to understand what they are and how much each component costs.
I use a spreadsheet to help understand an estimate of what those costs will be. Your lender will do a Good Faith Estimate when you've found an actual home to buy and that will look different from this initial estimate. But my goal is to get you to understand how much it will cost you to buy a home so when we are looking, you are completely informed and have the financial ability to back up your purchase.
So let's get to it!
Section 1
The purchase price is entered into this cell. It will set many of the other values of the spreadsheet so you can play with different scenarios. The down payment can be changed to the amount you will be putting down. Generally for an FHA loan you'll need 3.5% down and for conventional loans likely 10% or more. Your loan amount will change based on the down payment amount.
Section 2
In this section you'll set the values for the taxes, HOA/condo fees and property insurance amount. Each property you look at will have a different estimated tax on the property, which is different from the amount the current owner pays. I'll pull those tax records for you so you can enter the amount in this cell.
Call your insurance company to check the CLUE report for the property you are considering. You are looking for insurability on the property and to verify that there were not excessive claims due to damages. If there have been many reports, the insurance amount could be so high as to substantially change your monthly payment, to the point of not being able to afford the home.
Section 3
The interest rate you will be paying. Play with this a bit. See how much that monthly payment changes when you change that rate from 5% to 6%. This is what will drive so much of your home's overall affordability so it's important to understand its weight. The overall loan to value ratio will change based on how much you are putting down. The more you put down the less risk the lender feels they are taking.
Section 4
This section is what your loan will cost you. As you get the official GFE you'll be able to compare costs from one lender to the next. But one of the most important areas of this section is the points or where you could buy down your rate. Since you'll have this home for a while and since rate affects your overall affordability of the home, there are times when you'll want to consider paying a percentage up front to get a better rate for the long term.
The loan origination fee is what it costs to get the loan. These fees vary tremendously so you'll want to discuss with your lender
Important to consider is that this will consume some of your ready cash right now. As you work with your lender you'll play with the numbers to see how the rate and buy downs affect your total payment and cash to close.
Section 5
These fees are fairly similar among the settlement companies. I am happy to recommend some of those I trust. They will be the folks who handle the transaction at the end. A couple weeks before closing they'll be doing a title search and abstract to ensure there are no issues with the title, have a property survey done, ensure the parties get paid, the contract is fully executed, the lender's instructions are followed and all the paperwork that needs to be signed and filed is done in a timely and professional manner. All the parties to the transaction will meet at the attorney's office the day of settlement
The role the settlement attorney plays is very important and you want to be sure they will follow through on all filings that are required. Well respected firms are a much better option.
Your lender will require lender's title insurance and you can optionally buy an owner's policy. Since legal work can be so costly and since you cannot sell your property with a cloud on the title, it is generally strongly recommended you purchase both. Cost is $4.5 per $1000
Section 6
Can't get away from death and taxes. These are set by law so you'll know exactly how much they are depending upon the purchase price. The custom is for the parties to split the transfer and recordation taxes equally so the amount you see on this spreadsheet is the buyer's half. For Montgomery County:
- The County Transfer tax is 1% of the purchase price.
- The State Recordation tax is $6.90 per $100 for any amount under $500K and $10 per $1000 over that amount
- The State Transfer tax is 1/2% and is waived for first time home buyers.
Section 7
Depending upon the timing of settlement you will owe interest for some days. Mortgages are paid in arrears so you are always paying last month's mortgage. When you are settling you are paying the interest only for those days which you will actually occupy the home of the current month. This is one of the reasons why most buyers will settle at the end of any given month, since they might only accrue a day or two of interest.
You can pay your hazard insurance premium either at settlement or pay it directly to the insurance company beforehand. They will provide a binder to the settlement office as proof of insurance for the lender.
If you had a second loan, the interest rate for that is set in this section.
Section 8
Most of these charges are paid outside of closing (POC). You will pay your home inspector at the time of inspection, and you'll likely pay the pest company at the time of inspection. The survey will be paid at closing and you'll see it on the HUD1.
Surveys are either line drawings or boundary surveys. If you plan to do construction, put up a fence, or are uncertain where the property line is exactly it is better to spend the extra money on the boundary survey. The difference is ~$200 to ~$1200.
Section 9
The lender will open an escrow account for you to pay your taxes and your insurance. Since taxes can take a priority position if unpaid, the lender will protect its investment by ensuring the taxes are paid. And the same for insurance - the lender will make sure you don't let that coverage lapse and pays the premiums for you.
They'll collect 2 months of hazard insurance and depending upon the month of settlement will collect a number of months taxes to ensure they can pay the next installment.
If there is mortgage insurance or condo fees they will collect those in advance as necessary as well.
Section 10
If the seller has paid taxes through June 30 and you settle on May 31, then you will owe back to him/her the taxes for June since you'll be occupying in that month. Because our payment schedule in Montgomery County is wacky, we always have to figure this out carefully.
Section 11
This is the total cash to close section that will add up all the other areas and give you a number to bring to closing. it's an estimate but it should be pretty close to what will be the final unless you start to make a lot of changes with your lender on points or origination fees. I've seen folks get bitten by not remembering how much that is going to add and it's a surprise to come up with the extra money.
Your downpayment, the totals of the lender fees, taxes, attorney fees, prepaids and anything you owe back to the seller are all totaled. If you have an earnest money deposit or a seller credit that will be deducted from the amount you need to bring to the table. These funds must be in a certified check.
When you hear someone say a "seller credit" this is where it's applied. A seller could give you back, say, $10K to pay any of the fees we've outlined above, including points, condo fees, taxes, etc. For many buyers who are cash poor this is the way they can get into a home. The lenders have strict guidelines about how much seller help they'll allow in the transaction so we need to be careful if there are seller credits and we are negotiating a credit for home inspection repairs that we don't go above the amount the lender will allow. FHA has reduced this from the higher level. Seller credits are part of the negotiation you might have in the transaction.
Section 12
This section nets out your monthly payment. While not exact it's usually pretty close. Your PITI is the principal, interest, tax and insurance you'll pay each month. If there is a condo fee or MIP it will also need to be calculated into this payment. This is based upon the purchase price of the home. It's interesting to see how little a $10K change in your downpayment affects the monthly payment. There is a much greater difference if you can affect the interest rate so I encourage you to run the numbers and talk with your lender to see what is the most cost beneficial.
Section 13
We pay taxes twice per year as principal home owners: September 30 and December 31. Because this schedule is so close together we have to figure out how many months will be needed for escrow based upon the month of settlement. Because it's confusing it's easier to just estimate 11 months and then get more specific as a property is chosen and a date specified. There will be some amount you pay as the buyer and likely some amount due back to the seller.
So there you have it. Closing costs in a nutshell. Well, more than a nutshell and I know they are confusing! But armed with knowledge, you'll make a much better decision about that house you want to buy if you know exactly what it's going to cost you and how that fits into your financial plans. I'm always here to help you understand it all!
For information on market stats:
Average Inventory in Bethesda 20816
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