Buying a home typically requires a mortgage, and that is not free. Whether you are a first time buyer or you have been through the process before, this can be a stressful endeavor. It is likely the biggest investment you will ever make, so making sure you understand the process fully before you get those house keys is of the utmost importance.
Throughout your home purchase, third parties—such as your real estate attorney and your mortgage lender—have performed services. Closing costs include the fees these professionals (as well as others) charge for these services to finalize the real estate transaction and your home loan. Unfortunately, most of these closing costs are unavoidable.
What is Escrow?
Escrow is a legal arrangement in which a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction. Escrow accounts might include escrow fees managed by agents who hold the funds or assets until receiving appropriate instructions or until the fulfillment of predetermined contractual obligations. Money, securities, funds and other assets can all be held in escrow. It is often suggested as a replacement for a certified or cashier’s check.
What are Closing Costs?
Closing costs are the expenses, over and above the property’s price, that buyers and sellers usually incur to complete a real estate transaction. Closing costs occur when the title of the property is transferred from the seller to the buyer. The total dollar amount of closing costs depends on where the property is being sold and the property’s value being assigned.
Costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners’ insurance. The lender is required by law to state these costs in a loan estimate form (formerly known as a good faith estimate or GFE) within three days of a home loan application. Gifts of equity still incur closing costs.
Types of Closing Costs
Here is a guide to understanding the types of fees you will see on your closing paperwork. Many of these fees are misunderstood by first time home buyers and it is important to be understand what each entails. Some fees are company specific and the amounts often vary by location, many of them will still be on your final paperwork. Below is a list of potential fees you may see when you are preparing to close on your new home.
Loan Origination Fee: These fees cover the cost of processing and underwriting your loan. This fee goes to your lender in exchange for underwriting your loan and creating your loan paperwork. Expect to pay about 1% of your loan’s value in origination fees. Along with mortgage discount points, this will show up under Origination Charges on your Loan Estimate.
Discount Points: Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs. Points, also known as discount points, lower your interest rate in exchange paying for an upfront fee. Lender credits lower your closing costs in exchange for accepting a higher interest rate. The amount of this fee depends on the rate that was initially given and which rate you want to apply for.
Processing Fee: This fee comes from submitting and processing your loan application. This fee covers preparing all of the information for your application, verifying information, creating documents to the lender’s specification and facilitating closing between the loan under writer and title when necessary. Each lender has a different charge for this type of procedure.
Appraisal Fee: The appraisal fee pays for a licensed professional to determine what the home is worth before a lender will extend a mortgage offer. Estimating the market value of a single-family home will typically range from $300 to $450 or more for a larger home.
Underwriting & Documentation Prep Fee: These are the final steps in your loan processing that finalize the loan and provide the borrower with a clear to close on their home. This final step verifies all documentation is processed correctly and ready to move forward.
Recording Fee: The term recording fee refers to an expense charged by a government agency for registering or recording the purchase or sale of a piece of real estate. The transaction is recorded so it becomes a matter of public record. Recording fees are generally charged by the county where the transaction takes place since it maintains records of all property purchases and sales. The amount of the recording fee varies from county to county.
Notary Fee: Documents such as the deed of trust must be notarized by a registered notary before it can be recorded at the court house. This fee depends on the location for the sale of the home, each county determines the cost.
Title Insurance: Title insurance premiums can vary from a couple of hundred dollars to a couple of thousand dollars. Some factors that can affect the cost of your premium include the title search, examination, and expected cost of any title defects. This is protection for you as a buyer to make sure that the title is clean and that no contentions will be made against you as the new owner of the house. In the event there is an error found, the title insurance helps to protect you.
Personal Mortgage Insurance (PMI): This type of insurance is added to the total of your monthly payment. PMI is required to help ensure the lender is protected in the event the borrower defaults on their loan for any reason. If you make a down payment of less than 20% you will have PMI added to your monthly payment. However, when you reach more than 20% equity in the home, then you no longer need to pay PMI
Home Owner’s Insurance: This type of insurance protects the home should it experience some damage. Lenders require home owner’s insurance to be placed on the property before they will allow the loan to finalize.
Flood Insurance: This type of insurance is only required when the home being purchased is in a registered flood zone.
How to Reduce Closing Costs
It might feel like you cannot afford all of these fees on top of the down payment, moving expenses, and repairs to your new home. However, there are ways to negotiate these fees.
Fees are not the same across the board so shopping around is your best way to reduce your closing cost fees. This applies to lenders and third-party services, such as homeowner’s insurance policies and title companies. Many homebuyers do not realize that they can save significant money on closing costs if they compare fees from lender to lender. Also, you do not have to use the Title Company, pest inspector, or homeowner’s insurance agent your lender suggests. Do your homework and you could save some serious cash on those fees.
Appeal to the Seller for Help
You might be able to get a seller to either lower the purchase price or cover a portion of your closing costs. This is more likely if the seller is motivated and the home has been on the market for a long time with few offers. However, if you are buying in a hot market, you might get denied the assistance but it never hurts to ask.
Schedule the Closing at the End of the Month
Since you are required to pay prepaid interest for each day of the remainder of the closing month, closing at the end of the month is the best time of month to close when buying a new home. The closer to the end of the month you close, the less you have to pay in prepaid interest. However, make sure the closing is before the month ends. If you wait until the first of the next month, you could end up having to pay 30 or 31 full days of prepaid interest.
Negotiate Loan-Specific Fees
If you suspect a lender is adding on unnecessary fees (known as “junk” fees) to your loan, speak up. Ask the lender to remove or reduce fees if you notice duplication. Comparison shopping can be your ally in reducing closing costs, as well as finding competitive terms and rates.
Be especially wary of excessive processing and documentation fees in the following areas:
- Application fee
- Underwriting fee
- Rate lock fee
- Loan processing fee
- Broker rebate
Roll Closing Costs Into Your Mortgage
Certain lenders will offer to pay your closing costs or roll them into your loan. However, lenders who do this tend to charge higher interest rates to pay themselves for absorbing your closing fees, which means you ultimately end up paying interest on those closing costs, as well as higher interest on your mortgage. Do this only as a last resort.
What Happens at Citrus Heritage Escrow?
As your closing date draws near, you are probably exhausted. But taking a little extra time to plan ahead will save you time, money and stress — and make the move into your new home so much more satisfying.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200