Closing is the point at which a contract between a buyer and a seller is executed, and the title to the property changes hands. This process has a variety of associated costs, most of which are paid at closing.
Normal Closing Costs?Closing costs can be highly variable since they’re dependant on the size of the mortgage and the value of the property. Typically, closing costs are between three and five percent of the property’s value, and may include the following:
? Loan origination fees – also called points (one point equals one percent of the mortgage). The standard fee is one point. Paying more points can secure a lower interest rate.
? Title search and insurance – a title search examines a property’s historical records to ensure that the seller is the legal owner of the property. Title insurance protects the buyer if tax liens or unpaid mortgages are overlooked in the examination.
? Inspection fees – includes pest and property inspection.
? Mortgage broker fee – applicable only if you use a broker.
? Tax service fee – if the lender chooses to hire an independent service to monitor property tax payments.
? Document preparation and administration fees.
Payable in Advance?Most closing costs are paid when the sale of the property is finalized. However, some fees must be paid in advance, including:
? Application fee – the cost of processing the loan, usually payable at the time of application.
? Credit report fee – the buyer’s credit history is reviewed as part of the application process.
? Appraisal fee for the property.
? Pre-paid interest – the interest on the loan from the day of closing until the first monthly mortgage payment.
? Escrow account funds – may include two months’ worth of advance payments for mortgage insurance, hazard insurance, homeowner’s insurance and property taxes.
Hidden Costs?So-called hidden costs are those which lenders are not required to disclose in the Good Faith Estimate. These can include:
? Courier fees
? Notary fees
? Documentation fees
? Overnight delivery fees
? Processing fees
You can save money on these hidden costs by asking lenders to send documents by regular mail rather than by overnight delivery, or by asking if they can transfer documents electronically.
In a typical situation, the buyer of a property will pay closing costs. However, you can sometimes persuade the seller to pay for some or all of the closing costs. If your immediate finances are tight, reducing the amount of cash you need to pay at closing can be very helpful.
If you ask the seller to pay some or all of your closing costs, it is essentially the same as negotiating a lower sale price for the property. To a seller who is asking $200,000 for their property, there is no difference in accepting an offer of $190,000 and accepting an offer of $195,000 which includes agreeing to pay $5,000 in closing costs. To you as the buyer, however, it means that you’ve reduced the amount of cash you need by $5,000. You may not save any money overall, but if the seller pays for closing, it means you pay less cash up front. If you want to ask the seller to pay for closing costs, it can be as simple as deciding what you want to offer for the property, adding your estimated closing costs to it – and then making that offer contingent on the seller paying for closing. Note that if the market is slow or the seller needs to sell quickly, you stand a better chance of negotiating successfully.