What is Included in Closing Costs?
Closing costs refer to the expenses associated with buying property. These settlement costs are fees paid by purchasers upon receipt of their loan from their banks and generally range between 2-7% of the total loan value. While a substantial portion of these costs is paid on the day of closing, some of these costs are almost always paid on an earlier date.
The Real Estate Procedures Closing Act (RESPA) requires that lenders and mortgage brokers give buyers a Good Faith Estimate of all loan-related expenses due at closing. However, these estimates do not guarantee actual mortgage closing costs.
• The following charges are typically included in the total closing cost for a given real estate transaction.
Closing Costs to Obtain a Loan
• A loan origination fee, or point, refers to the lender's costs of processing the loan. This fee is generally a percentage of the total loan amount, and the percentage charged varies among lenders.
• A loan discount-i.e., point or discount point-refers to a one-time fee charged by the lender or broker to lower the interest rate. Each point costs one percent of the total loan amount and typically lowers the rate by 0.125%. Buyers should do their homework before purchasing discount points to insure that the points will actually save them money.
• The appraisal fee covers the appraisal report required by the bank to assess the property's value before lending buyers the money to purchase it.
• A credit report fee covers the reports that banks utilize to evaluate the purchaser's credit history. Banks use credit reports and scores, among other items, to determine whether the purchaser is a sound credit risk, the amount of money they can lend the purchaser, and the interest rate they should proffer.
• The lender's inspection fee is generally charged when a purchaser builds or buys a home that is still under construction. This fee covers routine inspections the lender requires to monitor the construction and provide the necessary funds as progress is made on the property.
• A mortgage insurance application fee might be charged if the percentage of the downpayment is insufficient to enable the loan to be approved without private mortgage insurance (PMI).
• An assumption fee might be included if the purchaser assumes the responsibilities of paying the seller's existing mortgage.
Closing Costs Paid in Advance
Closing costs paid in advance of the closing cover expenses that arise after closing. Prepaid interest is one such cost, and covers the interest due on the mortgage from the day of closing until the first monthly payment. In addition, borrowers obtaining PMI must pay some percentage of the premium at closing.
Hazard insurance is generally paid for at or before closing in order to protect the buyer and lender against risk of loss from hazards, such as fire and heavy storm. A piece of real estate at risk of flooding will also have to purchase flood insurance. Other types of insurance might also be required by some lenders in certain areas.
Escrow Account Payments
Purchasers usually begin funding their escrow accounts at closing by paying multiple monthly installments for each bill the lender pays for them annually, such as property taxes and hazard insurance fees. Lenders start making payments into escrow accounts at closing to ensure that there are sufficient funds available to cover the bills issued the next year. Note, however, that the amounts lenders can require purchasers to pay in advance are limited by RESPA.
Miscellaneous Closing Costs
Closing costs include the home inspection, even if it is paid prior to the date of settlement. Radon tests, pet inspections, and other specialized inspections performed at the property are also included.
Home warranty payments are likewise commonly included in closing costs.
There are various logistical arrangements for closings, which are factored into closing costs. Some states require purchasers to pay a real estate attorney to conduct a title search, apply for title insurance for the purchaser as well as the lender, and perform the closing itself. Other states like Florida allow specialty companies to deal with the title work, and closings occur in a variety of locations.
The closing agent might charge the purchaser a notary fee to notarize loan documents. The purchaser also pays a recording fee to record the new deed and other documents in public records. He or she might also be charged an overnight fee to send documents to the lender and a wire transfer fee for the transfer of funds.
Purchasers buying a home or condo in a housing development are sometimes charged a one-time impact fee, also known as a transfer fee. They will also pay a portion of the development's annual association fees at closing.
Buyers should note that although one's downpayment on the real estate might comprise much of the funds brought to closing, it is not considered a closing cost. Rather than an expense, it is a payment that increases the equity in the property.
Purchasers are rarely, if ever, responsible for all the closing costs just described. However, there may be additional fees included that have not been mentioned above, so buyers should always ask their lenders, real estate agents, and closing agents for an estimate of expenses they should expect for closing costs when planning for a particular real estate transaction.
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