Closing Costs Explained
When purchasing or refinancing a home, you will undoubtedly run into a complex list of closing costs. These costs can range from ten dollars to thousands of dollars. So how do you know if the closing costs are fair or necessary? This guide should help you amswer all of your questions. If you would like a second opinion on your current mortgage application, just give us a call. We will run a no cost quote so you know what you are being charged compared to industry norms.
Property Related Fees
If you are purchasing a home, we highly recommend getting a home inspection. The
home inspection is not a bank charge but is a related expense that needs to be considered. The inspection is completed to determine any issues with the property. That could be structural, cosmetic, or even safety issues. Because this is an expense you will likely pursue on your own, we will not quote the cost here.
The appraisal is a standard part of the mortgage process. Whether you are refinancing or purchasing a home, the appraisal is likely to be required. An appraisal compares your property to other properties in the area to determine the value of the home. The value is needed by the bank to determine how much money they can lend you. The average cost of an appraisal is $400 but this amount does fluctuate based on property location. Any charge above $550 should come with a very good explanation! Is the property a multi unit property? Are two appraisals needed that increased the charge?
Additional property fees might include a water test or septic inspection. If the property has a private well and septic system and you are applying for a government backed home loan, it is likely these items will be required. The average cost for a water test is $75 and the average cost for a septic inspection is $150.
If you are purchasing a manufactured home, you can expect to pay additional charges for a structural engineer certification. The engineer cert, specifies whether the slab and property currently meet current building code. Examples include a concrete slab below the frost line and any addition built on the property that could impact the structural integrity of the home. The cost for an engineers cert is typically $200 – $375.
Closing Cost Estimate
Attorney and Title Charges
If the property is located in an “attorney state”, then you are required by law to have a real estate attorney close the mortgage loan. If you are not in an attorney state, you will only need to pay a title insurance company to close the loan.
Title insurance is roughly .8% of the loan amount. This figure also varys by state but as a general rule this should help you gauge the validity of the charge. As an example, if you are purchasing a home for $200,000, you can expect title charges to be as high as $1600. Although the title insurance company is not affiliated with the bank, your mortgage representative should have a good enough relationship with the title company to provide an honest and accurate quote.
In order for the attorney or title company to close the loan, a settlement charge is typically charged. The average amount charged is $575. This fee covers the use of the attorney or title companies escrow account and time spent preparing the closing documents for the bank. If you have an attorney representing you at the closing, they will also have a personal representation attorney fee. This amount varies greatly from place to place. Some of my clients have paid as high as $3000 in Manhattan and as low as $350 in Albany, NY. Because you have the right to choose your attorney, this is something you should ask to make sure your closing fee estimate is accurate. If the mortgage company quoted $300 but you learn it will be $1000, you might be bringing more money to closing than you expected.
The town or city you are purchasing or refinancing your home in, will also have fees. The county will have a recording fee. The recording charges are related to The recording of the deed and mortgage at the county clerk’s office. The recording fee can also vary but is public information. Your mortgage representative should know this amount and always quote this accurately, however, I have heard horror stories from clients that first went with another lender. The best advice I can give is, take responsibility and compare the loan estimate with the information you can obtain from the county clerk’s office.
Transfer taxes are charged by the county and state. They are standard taxes in varying amounts depending on where you live. These taxes include mortgage and deed tax charged by the city and state. In New York State, this amount ranges from .75% to 1.5% of the purchase price.
If you are escrowing (taxes and insurance included in your payment ) , you can expect to pay a full year of taxes at closing. Some of the taxes are paid to the seller to reimburse for any taxes already paid for the year and the rest of the taxes are paid in to the escrow account to pay future taxes. If you are not including taxes in your mortgage payment, you would only need to pay the portion of taxes owed to the seller for taxes he has already paid. One question that comes up often is,”why am I paying so much in taxes at closing if it is included in the payment?”. Let’s assume you are closing in January and the property tax bill is due in March. Because you would only make one monthly installment payment of the taxes before the bill is due, you would need to pay 11 monthly installments at closing to have enough money to pay the bill in full in March. The date the taxes are due determines how much is paid to the seller and how much is paid in to the escrow account.
Bank Fees (Closing Costs)
Be weary of any bank that claims to have no closing costs. Based on the information above it is clear that the bank has little control over all of the closing costs. Unless the attorney, title company, state, and county agree to waive their fees, it is not likely you will not have no closing costs. When a lender claims to have no closing costs, what they really mean is, we do not charge anything.
The bank or mortgage company typically has an underwriting fee or processing fee or possibly a combination of both. A fair amount of charges is typically $1000 for all bank charges. In most cases, you will obtain a lower interest rate by paying the bank fees rather than opting for the no closing cost option. We provide estimates for both the no closing cost and closing cost option. A credit report fee might also be charged. The credit report fee is typically anywhere from $35 to $150.
Banks can also charge points. A point is a fee used to buy down the interest rate. If the market rate is 5%, anything below 5% will include a fee to buy down the rate. 1 point is 1% of the total loan amount. The same is true if you take a higher rate. The bank charges a higher rate so that funds are available to pay for your closing costs ( the no closing cost option). A professional mortgage consultant will provide many options including paying points, no points, and no closings costs. If cash on hand is limited you may not have the option to buy down the interest rate. Some closing cost can be tax deductible. Work with a knowledgeable tax accountant to learn more about filing taxes after paying closing costs.
Closing costs can be very complex but by trying to understand how they are calculated you will be better armed to deal with a banker charging too much and also recognize a lender that is doing business the right way. You will know what to expect at the closing table. If you found this article useful please share this information and if you would like to receive a custom no cost quote from us, simple give us a call or schedule a consultation.
Check out our article on today’s interest rates