It’s no secret that buying a home usually comes with
significant costs. Not only do you need funds for your down payment, but you’ll
need to cover closing costs as well. If
you’re like most buyers, you may be surprised at how high these costs can be.
Closing costs encompass a wide range of fees, most of which fall into four categories:
- Lender charges
- Title company charges
- Government recording fees and transfer tax
- Reimbursements to the seller.
Lender charges include any fees your lender is charging you for your mortgage. Common fees include:
- Appraisal fee
- Origination fee
- Discount points
- Processing fee
- Underwriting fee
- Credit report fee
- Flood certification fee
- Tax-service fee
- Wire-transfer fee.
If you’re having your taxes and homeowner’s insurance escrowed (i.e., included in your monthly mortgage payment), your lender will collect funds from you at closing as reserves to start the escrow accounts from which those payments can be made.
You’ll also be charged pre-paid interest at closing. Pre-paid interest covers interest on your mortgage from the day of closing to the end of that month, since your first mortgage payment will not cover that time period.
Title Company Fees
To protect their investment, lenders require buyers to purchase title insurance, and it’s also recommended for buyers paying cash. If you’re obtaining a mortgage, you may see a charge on your closing disclosure for lender’s coverage and a separate charge for borrower’s coverage. These will be some of your larger closing cost charges.
Common title company fees include charges for:
- Borrower’s title insurance coverage
- Lender’s title insurance coverage
- Endorsements to the title policy
- Closing protection letter
- Notary service
- Wire transfer.
Recording Fees and Transfer Tax
At closing, you’ll pay a fee to have your deed recorded at the courthouse, and if you’re getting a mortgage, you’ll have a fee to have the mortgage recorded as well.
In this area, there is a transfer tax on housing sales. The tax is usually two percent of the sale price, with one percent paid by the seller and one percent paid by the buyer. Transfer tax is one of the largest closing cost components. For a $400,000 purchase, for example, a one-percent transfer tax alone would be $4,000. In some areas, the transfer tax is even higher.
Reimbursements to the Seller
Sellers here typically pay property taxes in advance. These include local taxes, county taxes, and school taxes. Local and county taxes are paid on a calendar-year basis, whereas school taxes are paid for the year starting in July and ending in June. The title company prorates these taxes, calculating the amounts the sellers paid in advance for the time you will own the home and charging you that amount at closing. Other charges that might be prorated are homeowner’s association fees and municipal water and sewer bills already paid by the sellers.
If you’ll be obtaining a mortgage, your lender will require you to pay one year of homeowner’s insurance prior to or at closing. Ask your lender ahead of time whether you can pay at closing or whether you need to pay in advance.
Buyers may think of inspection costs as part of closing costs, but inspection fees are typically payable at or prior to inspections, not at closing.
Depending on the specifics of your purchase, you may have some additional closing costs not mentioned above.
Avoiding Last-Minute Surprises
Knowing what closing costs to expect will help you budget for your purchase and avoid unpleasant surprises. You’ll also be better able to review your closing disclosure prior to settlement to confirm that all your charges and any credits you expect to receive are correct. In addition to listing your charges and credits, your closing disclosure will specify the basic terms of your mortgage.
Read more of Annette’s real estate articles for the latest real estate advice.
If you’re planning to buy or sell a home, contact Annette Nelson at (610) 247-7892 or firstname.lastname@example.org
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