Written By: Mike Laquerre
Quite often home buyers are unaware or confused by the term “closing costs”. Their entire focus has been on their down payment in most cases. This is especially true for first time home buyers. What becomes included as closing costs for their particular transaction may vary. However, below are some common closing costs, where buyers expect to pay at the closing of their next home purchase.
Closing costs are defined as miscellaneous fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a land surveyor, local municipalities for recording the deed, etc.). The average closing costs percentage is usually about 2-5% of the purchase price, or say $4,500 on a $180,000 home, but 3-6% is certainly not uncommon. In addition to the down payment, say anywhere from 3.5-20%, a purchaser will also owe the lender and third parties fees and other costs, which are generally paid at the time of the closing on the mortgage. In the majority of cases, it is the buyer that pays the closing costs rather than the seller, however, on some loans such as FHA or VA loans, the seller may pay a portion. The lender will distribute an estimate of closing costs on the purchase of a particular house the buyer has selected. The good news is when a buyer purchases an Adams Home, the builder will assist with a majority of these fees on the buyer’s behalf when they utilize one of our many preferred lenders. This helps offset the initial shock of having to come up with additional funds.
The following is a breakdown and estimate of the typical costs associated with closing a residential mortgage, along with a brief description of the service the buyer is going to receive:
Lender Related Closing Costs:
- Loan Application Fee: A fee charged to process an application for a loan and covers predominantly administrative costs associated with the loan. ($150)
- Credit Report: The cost of obtaining credit history reports from the three major reporting agencies. ($75-$100)
- Private Mortgage Insurance: If the buyer’s down payment is less than 20% of the purchase price, lenders require this insurance to protect them if they have to repossess and can’t sell the house for the remaining loan balance. Typically, the annual policy for the first year paid at closing. In addition, the lender may collect up to three months’ worth of the following year’s premium at closing, and deposit the money into the escrow account. This becomes part of the buyer’s reserves. A buyer can expect to pay up to 1.75% of their loan amount.
- Initial Interest: This is to cover the interest from the date the buyer closes until the end of the month. For instance, if the buyer closes on Jan. 15, he or she will pay interest for the period of January 15th through the 31st. The buyer’s first payment will be due on March 1, which covers the interest for February, because interest always paid in arrears, that is, after it becomes earned by the lender. Depending on the interest rate, amount financed and down payment, the interest may accrue anywhere from $20-$40+ daily.
- Document Preparation Fee: Charge for the cost of preparing documents such as the mortgage, note, truth in lending, etc. ($550)
- Lender’s Title Insurance Policy: Lenders require the purchase of a title insurance policy that protects their mortgage interest in the real estate. Title insurance rates proscribed by law depending on the locality of the real estate and the loan amount. ($275)
Other Items Potentially Required by Lenders:
- Survey: Lenders often require a registered land surveyor to conduct a survey of your property to define the property size and boundaries, and to see if any part of the building or other improvements are “encroaching” on a neighbor’s property — or vice-versa. Surveys would also show any setback violations or other material matters considered problematic. ($300-$400)
- Appraisal: Lenders will require an appraisal to ensure the collateral is worth as much or more than the loan amount. ($650)
- Homeowner’s Insurance: (first year premium) Lenders will require payment of the first year’s hazard insurance (homeowner’s insurance) premium to protect, against fire, windstorms, and natural hazards. In order to bind the coverage, the premium becomes often paid in advance of closing. If the homeowner’s insurance is to be escrowed going forward, the lender will also likely collect several months’ worth of the following year’s premium in advance at closing, which will become deposited into the escrow account. Amounts can vary by company, but 2.5-3% of the sale price is not unheard of.
- Flood Zone Certification: Determines the flood zone of the property and the base flood elevation. ($10)
Title Related Closing Costs:
- Homeowner’s Title Insurance Policy: A homeowner’s title insurance policy protects the owner’s interest in the real estate from claims of ownership or other interests by others. Like the lender’s policy, the rates are mandated by law depending on the locality and the purchase price. It is a one-time premium for a policy that is generally issued and paid for at closing. There is no requirement that an owner’s title policy be purchased, especially on brand new homes. ($2,000+)
- Settlement Fee: A fee must be paid to a title company that has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee becomes split between buyer and seller. ($375)
- Document Preparation Fee: Charge for the cost of preparing legal papers. ($450-$550) Documents related to the immovable property. ($100-$200 depending on the length and complexity of the abstract)
- Government Recordation Charges: The recording fee becomes paid to a government entity, which enters an official record of the change of ownership. ($2,660)
- Proration of Property Taxes: Typically, the buyer will pay that percentage of the property taxes corresponding to the percentage of the year that the buyer will have owned the property. The lender may also collect property taxes on a monthly basis in the escrow account. If your property taxes are escrowed, you may pay up to several months in advance, which will be collected at closing, and deposited into the escrow account. In addition, the amount will vary depending on how long for that year the buyer will own the property and the assessed value of the property.
Other Common Costs:
- Wire Transfer Fees: In most instances, the lender is funding the transaction with a wire, as opposed to a check, so additional fees apply. ($25-$50) So there you have it. Purchasing a home can often feel intimidating, especially if the buyer is unaware of the associated fees with said purchase. If you’re in the market for a new home, please see our experienced Community Experts, who can guide you. Adams Homes has been serving those with a dream to own a new home since 1991.
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