Understanding Buyers Closing Costs – Who pays what?

With home prices so low and as a consequence, so many 1^st time buyers, I thought this tutorial about closing costs might come in handy. 

What Are Closing Costs?

Closing costs are fees paid when completing the sale of a home. The closing is the process that finalizes all legal documentation and results in transferring property ownership to its new owner. Some costs are one-time fees and others are recurring fees that will be paid over the life of the home loan.

Who Pays for Which Fees?
The seller and buyer each pay a share. Some costs are negotiable and regional customs may determine who pays what. Lenders are required to provide a good faith estimate of what the total closing costs will be, but that is just an estimate. Closing costs generally total about 3 to 5 percent of the total sales price of the property.

The buyer pays one-time, or non-recurring, fees relating to the property and the loan. Property-related fees include the down payment, property appraisal, home inspection, natural hazard disclosures, deed recording and purchase of a home protection plan. Non-recurring charges relating to the loan usually include fees for the loan application, credit report, loan origination, points (also called loan discount fees), private mortgage insurance (PMI) premium, title insurance policy premiums, deed recording, transfer of city, county and state taxes, escrows for homeowner's insurance and property tax, and the buyer's share of pro-rated costs for utility bills and property taxes. The buyer also pays clerical fees for courier and notary services and general processing and document preparation fees.

Recurring costs are the monthly payments. PITI—principal, interest, taxes and insurance—are paid by the buyer each month. These costs are best paid in cash if possible, as rolling them into the loan will burden these fees with additional interest charges.

Points / Loan Discount Fees
A point (or loan discount fee) is a sum paid by the purchaser to buy down the interest rate of a loan. Another way to look at points is as pre-payment on the loan's interest. Each point equals 1% of the loan amount.

Important Documents
Both the buyer and the seller will have signed a thick collection of important documents by the end of the process. When the transaction is complete, the buyer should have the deed (proves ownership), the mortgage and note, insurance policies, affidavits (binding statements made by either party), contract riders (anything that alters agreements in the sales contract), the Truth in Lending statement, and the HUD-1 settlement statement. The settlement statement spells out precisely what closing cost fees are being paid.

It is important to store all property sales or purchase documents in a safe but accessible location, as these papers will come in handy for preparing taxes and for other purposes through the years.  I provide a CD now of the entire transaction to those who don’t want all that paper.

(c) Patty Ross, KRXA Radio Show #209 - Aired June 3, 2011

Green Homeowner Tip: How to Dispose of Hazardous Waste Properly

We all have one—that shelf or cabinet with leftover paints, old bug killers and unwanted cleaners. You don’t want that toxic stuff near your kids or pets so you keep it out of reach.

It’s equally as important to keep those dangerous chemicals out of the environment. So when it’s time to get rid of hazardous household items, make sure you do your part and dispose of them the right way.

It’s estimated that every American home has an average of 100 pounds of hazardous household waste. This includes everything from paint and thinners to used motor oil, pesticides, bleach, cleaners and even batteries. Compact Fluorescent Light Bulbs (CFLs) are also considered hazardous waste due to the small amount of mercury they contain.


Let’s start with what not to do when getting rid of all this stuff. Pouring hazardous household waste down any drain sends the toxins directly into our water supply.
Drains include the ones inside your home and the storm drains outside. Pollution flowing into storm drains is called storm water pollution and it’s the leading cause of fresh water pollution in America.


You should also never put hazardous household waste in the trash. Whether it’s sending it to a landfill or burning it in a trash pile, both can release toxins directly into the air, land and water. Hazardous household waste needs to be disposed of properly. This means taking it to a qualified recycling center. You can also contact your county waste collection office for recycling information. Our is in Marina at the Monterey Regional Waste Management District.  Many communities hold hazardous household waste collection events throughout the year so be looking for those too.


Another way to reduce the amount of hazardous household waste in your home is to start buying less of it. Many times there are natural alternatives that work just as well. Eco-friendly cleaners and pesticides are more widely available on store shelves and while they may cost more to purchase, keep in mind the true cost of an item is always more than just the money you spend.


Just because the hazardous household waste may be out of sight in your home, it shouldn’t be out of mind. Identifying it, disposing of it and reducing the amount in your home are all easy ways to do your part for everyday green living.

(C) Patty Ross - KRXA Radio Show #208  - Aired May 27, 2011

Bankrupt homeowners shed second mortgages

Some struggling homeowners are using a little known, but increasingly popular, provision of the bankruptcy code to eliminate second mortgages and avoid foreclosure.

Bankruptcy laws prevent homeowners from eliminating the debt of a first mortgage if they plan to stay in their home.  But second mortgages are treated differently.  Second mortgages can be declared unsecured debt when there is no equity to cover them.

When that happens in a personal bankruptcy proceeding, the second mortgage is put on hold and no payments are required while the homeowner completes a repayment plan for other debts, which typically takes three to five years.  At that point, the second mortgage is eliminated.

While this strategy has gained in popularity among homeowners, mortgage bankers are not in favor of the practice, and have called it “a troubling phenomenon.”  However, there is little the mortgage industry can do, aside from seeking to change the law, which could be difficult given the current partisan lineup in Washington.

The law has been like this for years, bankruptcy lawyers say. It's just never been used as much because in the past there was usually enough equity in a home to cover the second mortgage.

Brette Evans, a San Jose bankruptcy lawyer says "We're having great results using the rule. In one recent case, a small-business owner was able to hang on to her home by setting aside a $240,000 second mortgage”, she said.

That put the borrower in "a safe zone" where she could work out a modification of her first mortgage.

(c) Patty Ross - KRXA Radio Show #207  - Aired May 20, 2011

Home buyers and mortgages – many flunked the test!

A new survey indicates that many home buyers are ill-prepared to take out a mortgage, answering basic questions about mortgage information incorrectly nearly half (46%) of the time, according to Zillow Mortgage Marketplace.

• More than 1,000 home buyers were asked to respond true or false to eight mortgage-related statements, including “The rates of 5/1 adjustable-rates mortgages always increase after years.”  Although the correct answer is false, because 5/1 ARMs do adjust after five years, but the rates could go up or down, 57% of people surveyed answered this question incorrectly.
• 45% of home buyers surveyed also incorrectly stated that home buyers should always buy mortgage discount points. The fact is the decision hinges on how long the borrower plans to own the property, and in some situations, buying mortgage discount points is not worthwhile.
• An additional 1/3 of respondents don’t understand that lender fees are negotiable and vary by lender, incorrectly thinking lenders are required by law to charge the same fees for credit reports and appraisals.
• Survey respondents also believe that pre-qualifying for a loan means they have secured financing.  With a pre-qualification, which is the earliest step in the mortgage process when a lender approximates the amount the borrower can afford, the lender does not run the borrower’s credit or request any documentation to verify the information provided by the borrower.
• Slightly less than 1/2 of the polled prospective home buyers also didn’t understand that Federal Housing Administration (FHA) loans are available to all buyers, but instead believe only first-time buyers qualify.  In reality, FHA loans can cost less for many buyers, including repeat buyers with low to average credit scores and with down payments of less than 20%. 

(c) 2011, Patty Ross -KRXA Radio Show #206  Aired May 13, 2011