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What are Closing Costs?
Closing is a process that begin weeks before closing, and follows an
outline set largely by a buyer's original offer to the seller of the house. That
sales contract , once it's signed by the seller, covers the key elements of the
settlement or closing.
Types of Closing Costs
1. Charges for Establishing
and Transferring Ownership
These include title
search, title insurance and related escrow fees.
2. Amounts Paid to State and Local
Governments
These include city, county and state
transfer taxes, recordation fees, and prepaid property taxes.
3. Costs of Getting a Mortgage
These include appraisal, credit checks, loan documentation fees,
notary charges, loan origination, underwriting, commitment and processing fees,
hazard insurance, interest prepayments, and lender's inspection fees.
Title Insurance
When it comes
to houses, providing clear title is not simple. Moreover, your lending
institution will not give you a mortgage loan on a house unless you can prove
that the seller owns it. The proof comes in the title search.
In many parts of the country, public records affecting real estate
title are spread among several 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) also must be examined. The title search may be carried out by
an escrow or title company, a lawyer, or other specialist. In addition to a
formal title search, your will require a title insurance policy. The policy
guards the lender against an error by whoever searched the title. Let's say, for
example, that a long-lost relative of the seller turns up with indisputable
evidence that the relative - and not the seller - holds legal title to the
property. Though it should have been found in the public records, the relative's
claim was missed somehow. Errors are rare, but they do occur.
The cost of the policy (a one-time premium) is usually based on
the loan amount, and is often paid by the purchaser. There's nothing, however,
to keep you from asking the seller, during your negotiations, to pay part or all
of the premium. The title insurance required by the lender protects only the
lender. To protect yourself against unforeseen title problems, you may also want
to take out an owner's title insurance policy. Normally the additional premium
cost is only a fraction of the lender's policy, but this can vary from area to
area. Some final advice on keeping title insurance costs low: if the house you
are buying was owned by the seller for only a few years, check with a title
company. If you can obtain a re-issue rate, the premium is likely to be lower
than the regular charge for a new policy.
Government Imposed Costs
While there is no way to avoid paying these taxes, you may be able to
lessen your share of the bill. Try shifting some or all of the cost to the
house. But remember, you must do this when you make your offer to purchase the
property.
Processing Fee
Imposed by
your lender, this charge covers the initial costs of processing your loan
request.
Appraisal Fee
This fee pays
for an independent appraisal of the home you want to purchase. The lender
requires this opinion or estimate of the market value of the house for the
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 to increase the yield to the lender beyond the
stated interest rate on the mortgage note. The greater the discount points paid,
the lower the interest rate. One point equals one percent of the loan amount.
For example, one point on a $100,000 loan would be $1,000. In some cases -
especially with refinances - the points can be financed by adding them to the
loan amount.
Mortgage Insurance
Buyers who
make down payments less than 20 percent of the value of the house may be
required by lenders, and by law in some states, to take out mortgage insurance.
The policy covers the lender's risk in the event the buyer fails to make the
loan payments. Premiums are typically paid annually from an escrow or reserve
account, or in a lump sum at closing.
Insurance: Homeowners & Hazard
A form or protection against physical damage to the house by fire,
wind, vandalism and other causes. Your lender will expect you to have a policy
in effect at closing.
Assumption Fee
This is
charged when you are taking over or assuming an existing mortgage on the house.
The size of the fee will depend on the lender, but it may range from several
hundred dollars to one percent of the loan amount.
Home Inspection Fee
For an
analysis of the structural condition of the property by an engineer or
consultant, and for termite inspections.
Various Expenses Between Buyer &
Seller
Some of the adjustments may involve large
amounts. Local property taxes, annual condominium fees and other lump-sum
service charges, for instance, may be split between you and the seller to cover
your respective periods of ownership for the calendar year or tax
period.
How to Anticipate Closing Costs
With such a long list of potential charges at settlement, it is
important to know what to expect. Your mortgage lender is required to supply you
with a Good Faith Estimate of all your closing costs within three business days
of your application for a loan. In addition, a statement of your actual costs
should be given to you at or before settlement. Within the same three days, the
lender is required, under the Truth in Lending Act, to provide you with a
disclosure estimating the costs of the loan you have applied for, including your
total finance charge and the Annual Percentage Rate (APR). The APR expresses the
cost of your loan as a yearly rate. This rate is likely to be higher than the
stated interest rate on your mortgage because it takes into account discount
points, mortgage insurance, and certain other fees that add to the cost of your
loan.
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