Financial Writing Bank
Closing Cost
Closing costs have been a complex part of the home buying process for many years. And in the current state of the market they are still a constant source of intrigue. A 2006 Bankrate.com survey determined the average cost for lender, title, and settlement fees was $3024. Interestingly, New York clocked in at the highest in closing costs, averaging $3,907. Closing costs are something every borrower and lender looks at curiously, as they can be both complicated and misunderstood.
First you need to understand that most closing costs can be divided into two basic groups. The first set of fees to be paid to state and local governments include city, county and state transfer taxes, recordation fees, and prepaid property taxes. These are legal and fixed.
The second set of closing costs are expenses incurred by obtaining a mortgage including title insurance, survey, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments. All of these costs are for the security of the lender to avoid unnecessary and un-expected and unforeseen troubles. Local government fees for appraisals, credit reports and title insurance are the same at every lender. One can expect to pay anywhere from 3% to 6% of the amount of your mortgage loan. These fees are expected to be paid by the buyer. Typically, the closing costs are deducted from the equity of your home.
If you wish to pay the lowest possible closing fees, it is highly recommended that you obtain at least three Good Faith estimates from different lenders in order to research your best options. RESPA allows the borrower to request a copy of the HUD-1 Settlement Statement one day prior to close in which the borrower can see a detailed list of all charges imposed in connection with the settlement. This is genuine information you can rely on. Discount and Origination Points which are equal to a percent of the loan amount can be lowered dependant upon the amount of money you can guarantee the lender at the time of closing.
Another important and mandatory fee is Origination Points, which are incurred for evaluating, preparing, and submitting a proposed mortgage loan. A one percent loan origination fee is equal to 1% of the loan amount. It may or may not be added to the quoted points. There are some lenders who prefer to quote origination points separately.
It is important to note that not all of the fees are being collected by the lender. Usually, the application fee and the loan origination fee go to the lender while the other costs are distributed among the appropriate institutions.
The application fee is charged to process the information on your loan. It is non-refundable and must be paid at the time you file the application. In addition, an independent appraisal of the home you want to purchase must also be done to estimate the market value of the house for the loan. This is called an Appraisal Fee.
Be aware of Title Company closing or escrow fees. This deals with a search of records including deeds, court records and property and name indexes to ensure that the buyer is purchasing a house from the legal owner without other claims or outstanding restrictive covenants such as unpaid taxes, unsatisfied mortgages and judgments against the seller. There are some issues which are hidden and difficult to detect once you have purchased your home and may jeopardize your right to ownership. These may include the previous owner, a possible claim by his legal spouse, fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. Generally, a pest inspection will also be conducted at the cost of the buyer unless the home is brand new, then it is unnecessary.
Be clear, a lender's policy and an owner's policy are two different title insurance policies. The cost of the policy is usually based on the loan amount. To ensure that the boundaries in the purchasing agreement are correct a Property Survey is required and involves a fee. Escrow amounts are to be paid by the borrower for some items that may come due after closing such as un-paid taxes and fire destroying collateral. The Escrow account is also collected by the lender and placed in a special account for any future property tax or insurance premium payments. But, if you have a Conventional Loan and do not have PMI (Private Mortgage Insurance), there is a provision that enables you to control your own escrow account and make your own tax and insurance payments directly.
Other financial issues such as recording and transfer charges may also be required. These costs are incurred to cover the cost of paper work and lender's and buyer's attorney fees for preparing and reviewing all of the documents needed to close your loan. Last, but certainly not least, remember the application fee, credit report fee and the appraisal fee will all have to be paid when you submit the mortgage application.
There are fees attached to a credit report which are called Report Document Preparation Fees. This consists of preparing all documents associated with the transaction as well as acquiring a credit report for each person purchasing the home. A mortgage credit report is a highly specific report in which all information is verified and generally runs around $50.
A lender can sometimes charge a series of fees in their closing costs including processing, underwriting, wire transfer, and funding fees. Be cautious as these fees can be indicative of the lender passing overhead costs on to the buyer. You should not pay these fees unless you are doing business with a mortgage broker.
Another important point to consider is homeowners insurance. This is required by the lender, and protects the homeowner from "casualty" (losses or damage to the home or personal property) and from "liability," which covers damages to other people or property. It is highly recommended that the buyer look in to getting a flood certificate and flood insurance. These vary with the level of risk for the property area and may not be required in some cases.
Another aspect to consider when buying a home is negotiating closing costs. In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. For instance, if a buyer is a bit nervous about the condition of the heating, the seller may agree to pay for the house inspection. Additionally, a buyer may want to cut back on initial expenditures, and agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs.
Ultimately, there is no right or wrong way to negotiate closing costs. But it is wise to make certain all the terms are indicated on the purchase agreement.
Let's take a look at something called Prorations. This occurs when certain costs are distributed among the buyer and seller at the time of closing. They usually consist of property taxes. This occurs because property taxes are normally paid at the end of the year for which they were assessed. If a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due until the next year. To make this situation more financially sound, the taxes are prorated. In this previous instance, the sellers will credit the buyers for half the taxes at closing.
Keep in mind that some programs that help you avoid closing costs seem like real money savers at first glance. However, some can pose a serious financial risk and end up costing you more in the long run. You can safeguard yourself from this with some precautionary measures. If you look closer at the fine print, the lender adds on points to the loan. These hidden points usually fall under the radar. Be very careful when you mortgage your house or property because you could end up paying a higher interest rate.