Closing Costs, Cash to close, and more!
What are the “closing costs” when obtaining a mortgage? There are a number of categories that fall under the closing cost umbrella. The most common are loan fees, prepaid items, initial escrow, and down payment which will be discussed below.
You are going to buy a house for $650K and plan to put down 20%. The real estate taxes are $6,000 per year and the homeowner’s insurance is $1,200 per year.
What would the closing costs look like?
I recommend you get a fee worksheet if you’re shopping around prior to completing an application and discuss it with your loan officer. Here’s a sample of what the Fee Worksheet would look like for this example. When you fully complete an application the lender is required to give you a Loan Estimate (a more official fee worksheet) within three business days.
- Down payment. 20% of $650,000 is $130,000.
- Loan fees. These are your one-time fees associated with obtaining the loan. This is the cost of doing business and is the most IMPORTANT part when comparing one lender and/or program to another. Here is an example of the loan fees you may see:
- Underwriting fee: $1,200. A fee charged by the lender we choose to process and underwrite the loan.
- Appraisal fee: $600. The lender-required fee for a home appraisal, often paid before the closing.
- Credit report: $75.
- Flood cert: $8. To verify the property is not in a flood zone.
- Tax service: $85. A service the lender uses to ensure the property taxes are correct and paid.
- Electronic Registration (MERS): $25. Cost to register the loan with the Mortgage Electronic Registration System which the industry uses to track loans.
- Closing fee: $750. Charged by the closing attorney to facilitate the closing.
- Municipal Lien Certificate (MLC): $50. Issued by the town to certify that all taxes and municipal charges are paid in full.
- Recording fees: $500. Recording fees are charged by state and local agencies for registering a property’s transfer of ownership.
- Survey fee: $125. To verify the property lines and any encumbrances.
- Lender’s title insurance: $1,430. Lender’s title insurance protects your lender against problems with the title to your property.
- Owner’s title insurance: $825. Optional but highly recommended insurance to protect your equity and any related charges if there’s an issue with Title after you take ownership.
- Total Loan fees: $5,673.
- Pre-paids. There are three main items which may be required to be pre-paid at closing.
- Homeowner’s insurance: $1,200. One year of homeowner’s insurance is usually required to be paid prior to or at closing.
- Real estate taxes: $1,500. If a tax bill is due within 60 days of closing and/or if a paid tax bill needs to be prorated.
- Mortgage interest: $1,190. This is the interest which will accrue for the remaining days of the month you close in.
- Total Pre-paids: $3,890
- Initial Escrow. Typically, as part of your monthly mortgage payment the lender collects 1/12th of your annual homeowner’s insurance and real estate taxes. The lender then pays the respective bill when it’s due. In addition to the monthly collection the lender usually requires that a two month cushion be added to the escrow account at closing. The total to start the escrow is approximately three months.
- Real estate taxes: $1,500.
- Homeowner’s insurance: $300.
- Total Initial Escrow: $1,800.
You may have the option to waive the escrowing of homeowner’s insurance and/or real estate taxes depending on the investor and program. Deciding to waive escrows can also negatively impact pricing.
- Program Fees. Depending on the loan program and terms there may be other fees. Your loan officer should discuss all the fees associated with a particular program.
The total closing costs in this example equal $11,363. And, the total cash investment to purchase this home in the above example would be: $141,363.
Now let’s discuss what Cash to Close means?
Prior to closing day you want to speak with your loan officer and closing attorney about how much, if anything, you need to bring to closing. Usually this needs to be done via certified check or wire. Personal checks are usually not accepted which is why it’s important to plan ahead.
So, the total we are starting with is $141,363. However, that’s typically not the amount that you actually need to bring to the closing. Here are a few ways that number is decreased.
- Good faith deposits. In Massachusetts it is customary to put down a total of 5% of the purchase price between the Offer to Purchase and the Purchase and Sale (P&S). In this case the amount would be $32,500.
- Items paid outside of closing. Some items are listed as closing costs, but are paid outside of closing such as the initial year of homeowner’s insurance and the appraisal. In this example, the appraisal and year of homeowner’s insurance were paid prior to closing for a total of $1,800.
- Discount points. Cost or credit associated with a particular rate. When there is no cost or credit associated with an interest rate we call that at “Par”. However, there is often a cost or credit which will either increase or decrease your closing costs.
- For example, say you can get 6.750% at par. You may choose to buy down the rate at a cost or choose a higher interest rate in return for a credit towards closing costs.
- Seller’s concessions. Seller concessions towards closing costs (and potentially buying down the interest rate) can range from 3% – 9% for conventional loans depending on the down payment amount. In this example of 20% down, you could negotiate up to 6% from the seller towards closing costs – $39,000.
- These concessions need to be negotiated and agreed to with the seller. I would recommend addressing this with the initial Offer to Purchase. The main issue with concessions is the property still needs to appraise at the full agreed upon sale price (including any concessions).
So, in our example, with an interest rate at par and 6% seller concessions you’d actually bring $68,063 to the closing.
Are closing costs always the same?
Unfortunately, these fees vary per town, state, lender and closing attorney. Again, I recommend you get a fee worksheet if you’re shopping around prior to completing an application and discuss it with your loan officer. When you fully complete an application the lender is required to give you a Loan Estimate (a more official fee worksheet) within three business days.
Are there any other fees?
There are other fees associated with buying a home that are outside of the mortgage related closing costs (e.g., property inspections, attorney fees, real estate commissions, etc.).
Please don’t hesitate with any questions or recommendations. These numbers are for example purposes only.