Closing Costs
Although closing costs can be paid by either the buyer or the seller by (mutual consent) the buyer pays most closing costs. Lenders usually prepare a “Good Faith Estimate” of closing costs for buyers that serve as an estimate of costs to be incurred in processing and executing a transaction. There are two main types of closing costs viz. non-recurring closing costs and recurring closing costs. Non-recurring closing costs are a one-time expense whereas recurring closing costs include costs you will have to keep paying throughout the course of your home ownership. Some of the closing costs are discussed below:
- Attorney/Lawyers’ Fees – Lawyers’ fees are paid by one of both parties for the preparation of official documents (such as mortgage agreement and sales contract etc) and other legal services. Mortgage lenders and borrowers usually have their own attorneys who help them dealing with nitty-gritty’s of various legal issues involved in a mortgage loan.
- Mortgage Application Fees – Mortgage application fees refer to loan processing fees paid by the buyer to the mortgage loan company. The application fees may be charged before or after closing the transaction at the discretion of the seller.
- Appraisal Fees – Appraisal fees are usually paid by the buyer (and may be paid by the seller through mutual consent) to a Professional Appraiser. Appraisers’ services are required by most lenders as a precondition for advancing the loan and help ascertain fair value of the property in question.
- Inspection Fees - Inspection fees are usually paid by the buyer (and may be paid by the seller through mutual consent) to a Home Inspector. A home inspector assesses the property in question for specific risks such as pest infection, earthquakes, floods etc.
- Flood Certification Fees - Flood certification fees are paid by either the buyer or the seller to assess if the property in question located in a flood zone. If it is located near or in a flood zone, flood insurance ill be required which will be paid for by the buyer.
- Recording Fees - Recording Fees are fees charged by government agencies for changing the official record of onwership of property. The buyer usually pays recording fees.
- Underwriting Fees – The buyer pays underwriting fees to the lender. Underwriting fees may vary from loan to loan and are usually paid to a staff member of the mortgage company.
- Home Owner’s Insurance - Homeowner’s insurance is paid by the buyer to cover possible damages to their home. An important point to note here is that home owner’s insurance does not cover damages from all possible sources and provides cover only for explicitly stated sources in the policy.
- Home Warranty - Home Warranty is an insurance policy that protects buyer against unexpected and potentially expensive home repairs. Being a type of home insurance home warranties is paid by the buyer. Home warranties have gained immense popularity in recent years and are favored by both buyers and sellers.
- Title Search Cost - Title search costs may be paid by either the seller or the lender as per the contract terms. Title service costs include costs of title search and title insurance. Title search refers to examination of historical records (including deeds and court records and other documents of a property) and is required by most mortgage companies. Title search helps avoid fraud by ensuring that you are buying the house from its legal owner and has no restrictive covenants or other outstanding claims.
- Title Insurance – Title insurance premium is paid by the mortgage insurance company or the borrower depending on the type of policy purchased. There are two types of title insurance i.e. lender’s title insurance and buyer’s title insurance. Title insurance protects the mortgage lender’s interest in the property as security against outstanding mortgage loan amount. On the other hand, buyer’s title insurance protects the buyer’s interest in the property.
- Points – The buyer buys points from the lender. However, they serve as prepaid interest and help lower the interest rate of your mortgage. One point equals to one percent of the total mortgage amount.
- Survey Fees - Survey fees are paid by the lender to confirm property specifications include covered area, plot size etc. Most lenders require a survey of the plot as a precondition to the loan. Surveyors also determine if any other property is encroaching on your legally owned area.
- Credit Report Fees - Credit report fees are fees charged by all national credit bureaus for supplying your credit report to the lender. The buyer often pays credit report fees.
- Brokerage Commission – Mortgage loan companies usually pay brokerage commission to a real estate broker for recommending them to the borrower. Real estate brokers provide services such as marketing the property, finding a buyer, and assisting in negotiations. Brokerage commission is usually paid as a percentage of the sale price of the house.
- Interim/Pre-paid Interest – Interim/prepaid interest is paid by the buyer to the lender. It is interest accured from the day the contract was closed to the first day of each month.
- Tax Service Fees - Tax service fees are paid by the buyer to a tax attorney if she chooses to hire one to handle the legalities of property tax payments. Tax services fees may also be paid by the lender since property tax payments take precedence over first mortgage payments so it is in the lender’s benefit to ensure you pay your taxes on time.
Closing costs usually amount to 1 to 8 percent of the purchase price of your home. However closing costs in most cases range between 2 to 3 percent of the purchase price of your home. Although your lender can give you a more realistic estimate of the closing costs in your particular case. Mortgage companies may try to squeeze out as much as they can so beware of any scams! Demand details of all the costs you will be paying and compare closing costs of different lenders because they can make one loan more attractive than the other. Never ignore them as a harsh reality you have to live with. It may be the most costly mistake of your life!