With home prices so low and as a consequence, so many 1st 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.
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.
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
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