What Is Closing & How Much Does It Cost?

What Is Closing & How Much Does It Cost?

Home buyers frequently look forward to “closing”, the final exchange of paperwork that officially transfers ownership of the property to them.

What is closing, though?
There are a lot of financial and legal obstacles that must be overcome when a house is sold, and “closing” is the word used to describe getting everything done. Some examples include mortgage loan funding, appraisals, inspections, insurance premiums, taxes, and attorney costs.

Both the buyer and seller can expect to pay a myriad of fees that they may not have been expecting. For instance, the Loan Estimate provided by lenders to home buyers typically does not include all of the fees that they will need to pay.

How Long Does Closing Take?

The amount of time closing requires varies, but generally falls into a range of 4-6 weeks. The process begins when the buyer and seller sign a purchase agreement, paperwork that specifies what the final closing date will be. The time between this purchase agreement and the specified closing date is called “escrow,” a period during which everybody involved in the transaction has plenty to do.

The closing agent is generally an attorney or a rep from the title company. They spend the escrow period figuring out loan payoff amounts for the seller’s mortgage(s), prorating the property taxes based on the closing date, receiving any special instructions from the buyer’s lender, and preparing the paperwork for both parties to sign at closing.

Your real estate attorney or the title company spends the escrow period researching the property’s ownership history. They will discover any liens or disputes that would call into question a seller’s legal right to sell a property, ensuring that there are no nasty surprises once the deal is finalized.

Your lender is hiring an appraiser to inspect the property. They need to know that the property is adequate collateral for the loan you are taking out in case something goes awry. They also prepare formal loan documentation and provide it to the escrow company.

As the buyer, you have plenty to do during escrow as well. Most lenders require you to provide a completed application and other documents at this time, and you also need to purchase homeowner’s insurance. Furthermore, you are expected to call all of the local utility companies to set up accounts in your name that will become active as of the closing date. You also need to physically pack up your stuff for the move if you haven’t already, and perhaps hold a garage sale to dispose of the items that you do not plan to take.

Finally, real estate agents oversee all of the processes above to ensure that everything stays on track for an orderly closing. Your agent should also accompany you on the follow walk through of the home, making it easier to make the necessary arrangements if anything is found wanting.

What Are Closing Costs?

A lot of people have to do a lot of work to handle the above, and they do not do it for free. Closing costs are the expenses incurred by both the buyer and seller to cover the necessary work, with who pays what generally determined by the purchase agreement or for whom a given individual is working on behalf of. Buyers are typically responsible for several small fees.

Expenses incurred at closing are usually trivial compared to the purchase price of the property, but there are enough of them that it can add up quickly (between 3-5 percent of the purchase price on average). Here is a quick rundown of the costs frequently paid by the buyer, though your individual agreement may differ from these general guidelines.

1. Loan Costs

Most loans start with a loan origination fee that covers the company’s administrative costs. It is typically around one percent of the total loan’s value, but some banks waive this fee entirely. Sellers also handle a portion of it in many areas.

You may also pay a loan discount, alternatively referred to as discount points. Think of this like a down payment paid today to get a better interest rate over the life of the loan. Every point equals one percent of the total loan, but the interest rate change you get varies by lender. It is best to shop around to get the most out of this expense.

Most home buyers are required to pay an appraisal fee too. This fee covers the bank’s cost to hire an independent appraiser to ensure that the property is actually worth what you are paying for it. It’s usually around $300, but varies with the size of the property being appraised.

You will also be required to fund a reserve account, also known as “prepaids.” Monthly mortgage payments frequently include costs not directly associated with the mortgage, including property taxes, assessments, homeowner’s insurance, and mortgage insurance. Prepaids are held in an escrow account by your lender, allowing them to ensure that you pay these things in a timely manner. Lenders often ask for two months worth of these payments up front to make sure that these bills can be paid when they are due.

Should the lender involve a lawyer in the transaction, the buyer can expect to pay a lender’s attorney fee of about $400. Some buyers have successfully contested this fee, however.

If you are putting down less than 20 percent of the property’s purchase price up front, many lenders require you to carry Private Mortgage Insurance (PMI) to protect them in case you default on the loan. Some lenders require a year’s worth of premium payments at closing, while others expect one lump sum that covers the premiums for the entire life of the loan. There is frequently an application fee associated with mortgage insurance as well.

There are other miscellaneous fees associated with your loan as well. A year’s worth of hazard insurance premiums protect the lender from any disasters that may destroy your home. You are also expected to prepay any interest that will accrue on the loan between your closing date and your first mortgage payment. A $25 credit report fee is standard in the industry, and loan application fees can range from $300 to $500 if applicable. Finally, you will be charged a lender inspection fee of approximately $100 if you are purchasing a home under construction.

2. Title Costs

The first thing you will be charged for is a title search to ensure that there are no tax liens or unpaid mortgages on your new property. This can usually be handled by a title insurance company, but some states require a lawyer to complete the search. Either way, it will generally run you $200-$400.

Next up are title insurance fees serving as a guarantee that your claim to the property is free and clear. A second fee may appear under the same name to make a similar guarantee to your lender. You can expect to pay 0.5 percent of the home’s purchase price for this fee, though it can be as high as 1 percent.

A licensed notary public must be on hand to ensure that the right people sign all of the closing paperwork, with the fee for this service varying by state. The fee may be waived if you close at the title office or escrow office, so consider doing so to save some money.

If you hire a lawyer to assist you at closing, be prepared to spend some money. Hourly real estate attorneys generally command between $150-$350 per hour, while those offering a fixed rate charge between $500-$1,500 per closing. Most states let you choose whether you want to hire a lawyer, so you can avoid this expense if you want.

3. Governmental Charges

Governments vary wildly in who pays these fees, but they aren’t too bad. It typically costs $100 to record a transaction in the public record, with additional transfer taxes in some jurisdictions. Tax stamps may also be utilized to collect these payments.

4. Other

Most buyers will not need to pay these fees, but some will. If a survey is required to draw property lines, you can expect a charge of around $1,000. A courier fee may be assessed if you use someone to deliver documentation where it needs to go, and you may pay a lead-based paint inspection fee if applicable.

Two things you should not pay as a buyer are the pest inspection fee and the documentation preparation fee. The former is the seller’s responsibility, while the latter is just a junk fee that adds $200 to your tab. Your agent should be able to get rid of it by negotiating with your lende

For more information about closing costs, please feel free to contact us at info@onestophomebuyersLLC.com


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