DON'T LET CLOSING COSTS
BE A SURPRISE
Many buyers are most often concerned with the amount of down payment that
will be required for their proposed purchase. It is easy to forget or under-estimate
the amount of closing costs that will also be required. These expenses mount up
quickly and can be a shock to the buyer. If these costs have not been
anticipated, they can result in the cancellation of the purchase . . . simply
for the lack of sufficient funds. So, here are the costs that need to be
considered in a purchase transaction.
1. ORIGINATION FEE: This represents the lender's charge for making the loan
. . . commonly called "points". One point represents 1% of the loan
amount. The origination fee reflects the lender's "risk" in the loan . . more points being charged
if the borrower's credit scores are low (because of blemished credit) or some
other "greater than normal" risk factor exists. Today's "no
points" or "no cost" loans are simply the acceptance of a higher
interest rate in exchange for "rebate pricing" with which the fees
are paid.
2. DISCOUNT POINTS: These are mostly connected to what are called "buy
downs" and are a reflection of the yield anticipated by the investor who
will ultimately purchase the loan. A buyer can "buy down" the
interest rate via the payment of discount points. For instance, instead of
accepting a 5.75% interest rate loan at a 1% loan cost, the buyer could choose
a 5.5% rate at a 1.5% loan cost. The additional one-half percent loan fee would
enable the buyer to acquire a one-quarter percent lower interest rate. Before
deciding to buy-down the rate, buyers are encouraged to discuss the savings vs the cost factors with their mortgage lender. The
decision to pay additional points will depend upon a number of factors
including, how long you intend to own the property, the actual cost of any
buy-down and who is actually paying the fee.
3. LENDER/ADMINISTRATION FEES: While these can vary depending upon the type
of loan, typical lender fee costs are between $850 and $1200 and include:
- Tax Service Fee
- Wire Transfer Fee
- Loan Documents Preparation
- Loan Processing
- Underwriting
- Flood Certification
In addition, a processing fee of between $450 and $600 will be charged by
the lender/broker. Many real estate authors point to these costs as the “garbage”
fees and encourage that they be “negotiated” and/or eliminated in
the transaction. The reality is that they fees have to be paid and they will
either be fully disclosed or “hidden” within the pricing structure.
Know that the fees will be paid and opt for full disclosure.
.
4. TITLE INSURANCE: Although the seller usually pays the major fee to assure
the transfer of "clear title", the buyer is charged an additional fee
to insure "extended coverage". This additional coverage (called an
ALTA Policy of Title Insurance) is required by the lender and results in a
typical cost to the buyer of between $300 to $500 in most
transactions. (Note: There are two title insurance fees usually involved
in the transaction. The ALTA is typically paid by the buyer and the CLTA is
usually paid by the seller but is often split between buyer and seller. Make
sure you understand title insurance coverage when you ultimately purchase).
5. ESCROW FEE: This fee is most often split equally between buyer and
seller. The buyer's expense is most often between $300 to
$400 in the average transaction. In VA loans, the seller is charged the
total escrow fee as the veteran is prohibited from paying this fee.
Additionally, estimate $150 for such items as recordation fees, federal
express charges and other miscellaneous escrow costs.
6. HOMEOWNER'S INSURANCE: The buyer is required to purchase a one year
homeowner's insurance policy paid for in escrow, with the average cost between
$400 - $600, depending upon the home value and coverage acquired.
7. TAX PRO-RATIONS: Buyers and sellers will be assessed their appropriate
portion of the existing property taxes to be "pro-rated" in escrow.
Depending upon the date of close of escrow (COE) and the assessed taxes, this
can be a significant sum. While not a closing cost required in escrow, buyers
will want to educate themselves as to the impact of "supplemental"
taxes that will likely come due 90 to 120 days after close of escrow.
8. IMPOUND ACCOUNTS: When a loan represents a sufficient risk (typically
above an 80% LTV), the lender imposes an "impound" requirement. This
means that the monthly payment will include an amount for taxes and insurance
as well as the normal principal and interest payment. There will be an initial
assessment to "start the impound account". This amount will vary
depending upon the month in which the loan closes escrow.
9. INTEREST ON NEW LOAN: Loan payments are due on the first day of each
month. The interest owed on the loan is always paid in arrears (i.e.; the
payment made on June 1st is in payment for the use of the money in May). This
necessitates a pro-ration of interest on the new loan from the day it funds to
the first day of the next month. The first loan payment is then due (in this
scenario) on July 1st. Depending upon the day of the month the loan is
"funded", this amount can be substantial.
10. APPRAISAL & CREDIT REPORT: These fees are typically paid at the time
the loan application is submitted. Credit reports are often acquired at the
lender’s expense but can cost between $15 - $20 (including
the required FICO credit scoring) and appraisal fees are currently $300-$400
for conventional and $400 for VA loans and/or conventional loans for non-owner
occupied type loans.
While this is not intended as an exhaustive list of loan costs, it does represent
the basic fees. The costs can become rather substantial depending upon the loan
circumstances. To avoid surprises you may find it beneficial to discuss the
type of loan you wish to acquire and secure an estimate of the closing costs
from your lender early in the loan process.
The closing costs for refinance transactions differ somewhat but are still
often more than borrowers anticipate. Again, it is advised that you thoroughly
investigate the estimated closing costs before proceeding with your loan. And,
make sure you acquire an accounting of “all the expected costs”.
Refinancing can be expensive so it is usually not a good idea to enter into a
loan option that will automatically require you to refinance within a couple of
years.
As with any financing arrangement, to avoid unwelcome surprises, meet with your
trusted mortgage loan officer and make certain that you understand the process completely.