Explaining Your Estimated Closing Costs

The costs of closing a real estate transaction generally include the following: Title & escrow fees, lender fees, points (an optional expense), appraisal fees, credit fees, insurance and taxes.

In a purchase transaction the party responsible for paying the big ticket closing costs, the title, escrow fees and transfer taxes, is determined contractually (refer to your purchase contract). Typically the party who pays is based upon the custom of the county in which the property is located. For example, one counties custom may require that the buyers of property pay the title, escrow fees and transfer taxes while another may require the seller to cover the expenses and yet another may require that the fees be split 50-50. When purchasing new construction and you are working with a builder, the builder may or may not pay your title, escrow fees and transfer taxes regardless of the county custom (depending upon prevailing market conditions). It is important to first know the custom of the county in which you are buying and to refer to your purchase contract to determine the fees you are responsible for and have agreed to pay.

Title & Escrow Fees

Include both the owner's and the lender's policy of title insurance as well as the escrow fee. Title insurance protects both the buyer and lender by insuring a clear chain of title, that the persons with the legal right to convey title to your property are the ones who have actually done so. Also, some polices protect against the occurrence of fraud and forgery.

The escrow fee is a service fee charged by the title company for acting as an independent third party in facilitating your transaction and insuring that all parties to the transaction perform as contractually agreed to.

Other title fees include the fee to notarize your loan documents (the notary fee) the fee required to record your deed of trust with the county recorder's office (the recording fee), as well as miscellaneous drawing, courier and express mail fees.

You may call the title company handling your purchase, provide them with the purchase price and loan amount you're requesting and they can supply you with an accurate fee quote based on the specifics of your transaction.

Lender Fees

The flat fees that a lender charges to process and fund your loan fall under a variety of names and can generally be lumped into one category the industry refers to as "lender fees". They include: underwriting, processing, administrative, document preparation and funding fees. Additional lender fees include wire transfer fees, tax service fees, and flood certification fees. These fees are charged by virtually all lenders and range dramatically from lender to lender. So, ask about these fees when you're searching for a loan. These fees make up a large portion of what contributes to the difference between the advertised loan rate (i.e. 5.5%) and the APR (i.e. 5.875%) on the same loan.

Points

Points generally fall into two categories, discount fees and origination fees. Discount fees are prepaid interest that a borrower elects to pay up front to buy down the interest rate down on the loan. An origination fee is also used to buy the interest rate down but is used to compensate the loan originator in the transaction, rather than accepting a higher interest rate where the lender funding your loan compensates the loan originator. A point is equivalent to 1% of the loan amount (i.e. one point on a $300,000 loan is $3,000).

Appraisal Fees

The fee an appraiser will charge to inspect your property will depend on the type of property involved (i.e. single family vs. duplex to multi-family) and whether the property will be owner occupied or used as an investment property. The typical fee for a standard owner occupied single family home, condominium or townhouse is $200-$400. An investment property typically requires a rental survey and operating income statement to be completed with the appraisal and can add an additional $100-$300 to the cost of the appraisal. Also, if you are purchasing new construction, the appraiser may have to return to the property an additional time to complete a final inspection, to insure that construction has been completed as proposed. This fee might amount to an additional $25-$100. The appraiser is typically assigned by the lending institution as one of their agents. Ask your lender to review these costs with you when shopping around for a loan.

Credit Fees

The fees to check your credit (using three credit bureaus as lenders require) range from $25-$100 per person or per married couple. If your credit report has many inaccuracies on it, the costs to correct the errors could generate higher fees from the credit reporting company.

Insurance Fees

If you are buying a property that does not have a homeowner's association (typically found with condos or town homes) which carries a master policy of homeowner's or hazard insurance, you will need to shop for such a policy on your own. The lender will require that a policy of homeowner's or hazard insurance be in place at the time of closing on the property. The usual coverage requirement is for replacement cost coverage but this could vary amongst lenders. If your property is located in a geological hazard zone (i.e. earthquake or flood zone) the lender will ask that you have policies in place to cover these hazards as well.

Geological hazard zones are established by FEMA and the appraiser can determine whether your property is located in such a zone by referring to the most current FEMA geological hazard map. The real estate agents handling the transaction as well as the seller of the property should be aware of any hazard zone classifications.

Check with the insurance carrier or agent of your choice for a homeowner's or hazard insurance quote as well as a quote for quake coverage if you require it. Contact The National Flood Insurance Program at 800-638-6620 for a flood insurance quote if this coverage is needed.

Mortgage insurance may be required on your loan if only one lender is financing in excess of 80% of the value or purchase price of the home. This fee can be charged as a lump sum fee at closing or can be financed on a monthly basis. Mortgage insurance can also be avoided by choosing an 80% 1st mortgage, combined with a second mortgage AND your down payment. It might be something like, 80-15-5, where 80is the percentage of your first mortgage, 15 is the percentage of your second mortgage, and 5 is the percentage of your down payment. This 'blended' approach is offered by many lenders and can eliminate Mortgage Insurance. Ask your lender when shopping around if this option can be used in your situation.

Taxes

In addition to property taxes, which are pro-rated at closing between the buyer and the seller, there are additional taxes, which may be due at the time of sale. They include both county and city transfer taxes. Like title and escrow fees, the party responsible for paying the transfer taxes will be determined contractually and are typically based on county custom (although not all counties and cities assess transfer fees). Refer to your purchase contract to determine if they are required and who is responsible for paying them.

Depending on which side of the deal you are on (Selling side Vs Buying Side) you may have to pay tax stamps to the County. For example, in Massachusetts, the seller (unless otherwise stipulated in the Purchase Contract) must pay $4.56 for every thousand dollars of the sale price. In Rhode Island the tax is $4,00 for every thousand dollars of the sale price. Example: Sale price of a home in Massachusetts is $300,000, then the seller will have to pay $1,368.00 in tax stamps to the State ($4.56 X 300).

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