Closing Costs When Buying Or Refinancing
The asking price is just the beginning when it comes to the cost of homeownership. With different forms of insurance, taxes, repairs, lawyers and realtors, investing in a new home can feel like having money-devouring termites unleashed into your bank account.
Closing costs account for a large chunk of forgotten fees of homeownership. Closing costs normally include taxes, an origination fee, an amount placed in escrow, and charges for obtaining title insurance and a survey among other things. Everyone buying or selling a home will run into these fees when it comes time to transfer ownership and often buyers and sellers of real estate will use them as bargaining tools or incentives.
It is important to remember that closing costs are over and above the price of the property so if a seller isn't paying for them the buyer must save up between two and six percent of the mortgage amount to cover these costs. If you invest in a $150,000 home you could pay as much as $9,000 in total closing costs.
Closing costs differ from state to state but most lenders and real estate agents are able provide estimates of what these costs will be to prospective homebuyers.
Closing Costs that Occur When a New Home is Purchased:
- Loan Origination Fee
- Appraisal Fee
- Lender's Inspection Fee
- Credit Report Cost
- Document Preparation Fee
- Title Search
- Title Insurance
- Escrow Fee
- Transfer taxes
There is a long list of closing costs that can come up when a property is transferred from one owner to another, but the above are fees that new homeowners are most likely to encounter.
The loan origination fee is charged to the homebuyer by a lender, usually a bank or financial institution, to cover administrative costs of processing the loan or mortgage. This fee is typically the most expensive of all the closing costs. Many lenders will charge points to originate a loan and in most cases one point is equal to one percent of the loan amount. An origination fee for a $200,000 mortgage could cost up to $2000 if the lender charges one point or 1%.
The appraisal fee is another popular closing cost that many new homeowners will encounter. With the appraisal fee the buyer pays a professional real estate appraiser to estimate the market value of a property. The appraiser will determine whether the price the buyer is prepared to pay for their home is justified by comparing the price to that of comparable properties on the market in the same area. Almost all lenders require that this appraisal be done before they will approve any borrower for a mortgage.
Another fee that usually needs to be paid in order for lenders to qualify their borrowers for new mortgages is the lender's inspection fee. This fee is paid to an expert to determine the physical condition of the home the buyer is planning on investing in. This fee is normally encountered when the buyer is purchasing a home that has just been built and the inspection is often tied to a process called the 442 inspection, which verifies that construction on the home is complete.
Whenever anyone applies for a mortgage the lender will need to obtain a copy of the potential borrower's credit report. The credit report cost is a fee charged by lenders to potential borrowers to cover the cost of obtaining their credit report from a credit bureau.
Many homebuyers will also encounter a document preparation fee which is a fee charged by lenders for to prepare documents necessary to fund the loan.
The fees for obtaining a title search and title insurance go hand in hand. A title search is a detailed examination of the history of the property that the buyer is interested in. These searches usually include an examination of historical records, deeds and court records to ensure that the person that the homebuyer is buying the home from actually owns the home. This search is essential when it comes to the new owner of the home being assured that there are no other claims to the title.
After the title search is done the homeowner is usually required to obtain title insurance. Title insurance is designed to protect lenders and homeowners in the event of title search errors or legal ownership disputes that may erupt over the property they invest in.
Escrow fees, when necessary, are usually split between the buyer and the seller. The escrow is a neutral third party that holds onto money and documents during the transfer of property from seller to buyer until the transaction of transferring homeownership is closed.
By the time people become mature enough to buy homes most realize that whenever they buy or sell anything the government will find a way to take a piece of the earnings and this remains true when it comes to homeownership. Like most forms of taxation transfer taxes are based on the price of the item, which in this case is the property. States, counties and municipalities charge transfer taxes whenever a piece of property is sold.
Realtor, mortgage broker and attorney fees may also have to be worked into closing costs depending on how many people are actually involved with the buying and selling of a home.
With so many fees involved with buying a new home it is no wonder that some homebuyers ask their sellers to cover closing costs, but buying is not the only instance in which closing costs are encountered.
Some closing costs can also rear their ugly heads when a homeowner attempts to refinance.
Refinancing involves obtaining a new loan or mortgage to pay off an existing loan or mortgage and people often do this when interest rates drop or when their property has appreciated in value.
Typical Refinancing Closing Costs:
- Payment of Outstanding Interest
- Demand Fee
- Reconveyance Fee
These fees can be in addition to application and processing fees that lenders may charge when a new loan or mortgage is issued.
Generally when homeowners accept one loan or mortgage in replacement of another there will be leftover interest due on the old loan that the homeowner will have to pay after closing the deal on the new loan.
The lender that issued the old loan or mortgage that is being replaced in refinancing may also charge a demand fee and a reconveyance fee. The demand fee is usually charged to the homeowner by their lender for having calculated the figure that needs to be paid off. The lender also typically charges a reconveyance fee when they reassign the ownership of a homeowner's property back that same homeowner.
Closing costs will differ depending on each area so before you invest it is important to check out which ones are applicable in your specific region. It is also essential to shop around for lenders who may offer lower rates for certain closing costs or lenders who are willing to overlook the paltry document processing fees that others might insist on.
Before buying or refinancing each and every homeowner should inform themselves about closing costs and ensure that there is enough money set aside to cover them if someone else, like a seller, isn't willing to cover them for you.
