Closing costs can be a scary thought to most people. Mostly because they’ve heard many closing cost horror stories or maybe experienced a horror story of their own. Usually it is because someone didn’t properly explain closing costs to them. And lets face it, most of us are afraid of the ‘unknown’ …especially when it affects our pockets and pocketbooks!
Let me try to explain this to you best I can. There are really 2 totally different parts associated with the closing of a real estate or mortgage transaction and everyone always lumps them together and calls them ‘Closing Costs’.
Part One – Closing Costs
These are truly the ‘Closing Costs’ because they are the actual ‘costs’ of doing the real estate or mortgage transaction. These ‘costs’ usually consist of things like: appraisal fee, survey fee, origination fees, processing fee, underwriting fee, tax service fee, credit report fee, courier fees, attorney fee, title fees, closing fees, various state or county tax fees and recording fees. These fees can vary depending upon what State you are in, what type of loan you obtain and which lender is selected. For the most part, these fees do not vary by much as they are very normal fees for each person’s part in the transaction. Each person – ie your appraiser, your processor, your attorney, your title people – are all involved in bringing your real estate or mortgage transaction to closing and each one of them get paid for doing ‘their part’ or their job. None of the fees are outrageous by any means, but they DO add up. Your Loan Officer will go over a ‘Good Faith Estimate’ with you in detail so you understand what to expect at the closing of your transaction.
Part Two – Prepaids (commonly known as Escrows)
Prepaids or Escrows are not ‘costs’ for doing the transaction. However, they are due at the time of closing so therefore people tend to include them in when they say ‘Closing Costs’. The ‘Prepaids’ consist mostly of your real estate taxes, your homeowners and/or flood insurances and the daily interest on your new mortgage loan. Most lenders prefer you to ‘escrow’ your taxes and insurance for your home. This means they roll those payments into your monthly mortgage payment so that you don’t get hit with a big bill when they come out next year. At the closing, the lender must establish an escrow account for you. Depending upon when your real estate taxes are due in your State, Town or County, the lender must make sure they collect enough funds at closing to be able to pay that next tax bill or insurance bill when it comes due. So at your closing it is not uncommon to see an escrow for 3 or 4 or 5 months worth of taxes and/or insurances. When you are Purchasing your home, the Insurance must be paid in advance for the first year. Usually about a week before closing you should start to line up your homeowners insurance and get that paid for. Then, again, the lender will roll 12th of the premium into your mortgage payments so that next year when the insurance bill comes due again you won’t get hit with a big bill and the lender will take care of paying it.
UNDERSTANDING CLOSING COST