UNDERSTANDING CLOSING COSTS WHEN BUYING

In this article, we are going to try and clarify what closing costs are and what to expect. Be sure to print this out and hand it to your agent, then ask them what exactly you will have to pay at closing.

A common mistake that causes tremendous amount of frustration by new homebuyers is underestimating the amount of cash (closing costs) needed to move into the home. Most people wrongly assume that all they need for closing is the down payment. People simply don’t understand what occurs during closing, failing to ever ask for specifics from their agent. Often times they overlook the hard and soft closing costs of services required throughout the home buying and mortgage qualifying process. These items quickly add up to a substantial amount and can devastate the transaction if not planned for properly. While each deal is unique, homebuyers should be aware of and plan for the following cash outlay items when purchasing a home:

First is the Non-Recurring Closing Costs
Non-recurring closing costs are 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.

Except for 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 pay.

Application Fee & Credit Report
The application fee will often time range between $400 and $550. If the credit report is run at a separate time, you could pay a fee from $25 to $150. For those self employed, you will also need a business report that costs between $40 and $100. These fees are often non-negotiable by the lender, so shop around to find the best price – but do not let it take president over the actual loan specifics!

Appraisal Fee
The appraisal is for a precise estimate of the home value, similar to a CMA (comparative market analysis). This fee covers an independent appraisal of the home you want to purchase. This is required by the lender for an estimated 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. The fee can range anywhere from $300 to $800.

Documentation Fees
Some lenders charge miscellaneous fees for various services, such as underwriting, processing, and documentation preparation, which usually total less than 1 percent of the loan amount.

Home & Pest Inspections
The home and pest inspection ensure that you are buying a structurally sound home, free of any unwanted pets like termites. This cost will vary, depending on the size of your home and location. Anticipate paying between $300-$700 for these services. Shop around, but remember that these inspections are for your benefit, so cheaper is not always better!

Loan Origination Fees & Discount Points
The origination fee is the payment to the lender for their efforts in the transaction. Discount points are prepaid finance charges imposed by the lender at closing, which often times helps you get a better rate. Paying points can save thousands over the long term, so have the lender breakdown the payments and cost, so you can see which loan is best for your situation. One point equals one percent of the loan amount. For example, one point on a $100,000 loan would be $1,000.

Survey
The lender will require verification from a surveying firm stating that the home will remain the same as seem from the last survey and that no additional structures have been added. Sometimes the lender will require a complete survey to make sure all legal codes and regulations are met. This service can range 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. As a result, you will have to pay for Document Preparation, Title Search, and Title Insurance. The fee for Document Preparation ranges from $50 to $200.

The title search is done to prove to the lender that the seller owns the property. This process involves reviewing public records in local government offices, such as recorders of deeds, county courts, tax assessors, and surveyors. Within these offices, records of deaths, divorces, court judgments, liens, and contests over wills must also be examined. Once the search is done, the service then assures the lender that there are no claims against the property. The cost is based upon the purchase price and can range between $400 to $800.

Title Insurance is another fee, which protects the lender from any errors within the search. An error could result in the lender giving you money for a home that was actually never owned by the seller. Lenders Title Insurance runs about .2 percent to .5 percent of the loan amount and is paid by the purchaser. Owners Title Insurance protects you from title search errors and ranges between .3 to .6 percent of the purchase price of the home. Speak to your agent for further details and recommendations on title insurance.

Government Fees
Government-imposed fees include city, county and state transfer taxes, recording fees ,and prepaid property taxes.

Recording Fee
This fee is paid to the title company and 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
Time to pay Uncle Sam. Generally four to eight months' taxes are collected at closing and held in an escrow account, setup by the lender. This will cover the first few months of mortgage insurance, hazard insurance, and property taxes. The escrow account ensures that sufficient funds are available for these expenses after the home purchase is made.

We just covered non-recurring charges, now lets look at the recurring costs. Recurring Closing Costs are those costs of homeownership that will recur over time, after the initial upfront charge is paid at closing. Generally what you can expect in this category are continual payments for interest on the mortgage, homeowners Insurance policy, and real estate tax & homeowners fee and mortgage insurance premiums. 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 fire, wind, vandalism and other causes. The majority of states require that the annual premium on your homeowner's insurance be paid in advance, put into effect at closing. Homeowner's insurance varies, as 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. It covers loan interest from the day you close through the end of the month. Therefore, it can range from 0-30 days' of interest and is then payable to the lender.

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 to take out mortgage insurance. The policy protects the lender's risk in the event the buyer fails to make loan payments. Premiums are generally either paid annually from an escrow 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.

Move In Costs
Move in costs cover the fee for moving your belongings out of the home and into the new home. These fees can range dramatically, depending on who does the moving, the distance, and amount of items that need to be moved.

Closing Comments
There are many ways you can reduce these cost and the amount of cash needed at closing. Hiring an experienced or well-trained agent and lender will help. Their qualifications and education will make the process easier and eliminate mistakes or unwise decision-making.