Closing Costs and Pre-Paids Demystified
Often, buyers do not understand what the term, closing costs or "pre-paids" mean, what closing costs include, who pays for them and how much they will be? Closing costs are expenses and/or monetary adjustments, over and above the purchase price of the property, incurred by buyers in the transfer of ownership of a property, at the time of the actual "closing". In order to ensure that a closing goes smoothly, a buyer should always try to understand and become well acquainted with the various closing costs associated with their particular transaction as well as not hesitate to ask their attorney, lender and/or broker any questions pertaining to any aspect of the transaction.
• Attorney's fees typically: $800.00-1500.00.
Some States, like Texas and Missouri, close at title company offices and the title company and its attorneys handle all the closing details. Massachusetts, however, is known as an attorney state and attorneys handle all the closing details and title searches themselves. Their fees depend upon the time involved and the issues that may arise throughout this process. Legal costs of title examination, survey/plot plan and municipal lien certificate may push the final cost to the high end of the stated range.
• Legal costs of preparing mortgage documents
While a buyer’s closing costs are generally paid at the time of the actual closing for escrows and for lender, attorney, and transfer fees, some lender costs such as appraisal, credit report, rate lock fees, and prepaid legal fees must be paid in advance. The client should be prepared to pay approximately $300 - $1,000 for these “application” fees. Over all, the total fees can be minimal to “maximal”. Fees for the following: the lender’s attorney, application and processing, credit report, appraisal, points, tax service, flood certification, and title insurance premiums, vary greatly by lender. All residential loan applicants receive a “good faith” estimate of closing costs within three days of application in accordance with the Real Estate Settlement Procedures Act which outlines in detail each of the above fees. It is important to note, however, that just because the lender is the party who prepares the estimate, not all closing costs are charged by the lender. The lender is merely preparing an estimate of the costs a buyer may incur when purchasing and is not required to list all potential costs because the lender does not always know what all the final costs are actually going to be. The estimate, therefore, is an educated guess based upon past experience and type of loan program. Since some things may be omitted, it is always best to anticipate that actual third party costs (such as title, appraisal, taxes, and recording fees) might be greater than the estimate.
• Points and loan origination fees.
Points and loan origination fees are usually based upon a percentage of the loan amount – often 1%. For example, a quote of ¾ + 1 equates to .0175 times your loan amount.
• Registry of Deeds recording costs: $300.00-500.00.
Fees depend upon the number/type of documents being recorded of deed, typically mortgage and municipal lien certificates. Select the county in which your property is registered for its current schedule of fees: Norfolk, Suffolk, Middlesex.
Escrow accounts are set up at closing to ensure that your taxes and insurance are paid in a timely manner. This advance payment or escrowing of taxes, homeowner’s insurance, condominium fees, and private mortgage insurance constitutes "prepaids", as opposed to closing costs. Although there is some government figuring in the final calculations, you can pretty much expect to pay 14 months’ of insurance premiums upfront, along with 3-6 months’ of taxes, interest for the number of days left in the month you are closing, a month of mortgage insurance (if applicable), and homeowner’s association dues, if applicable.
Bottom line, although closing costs vary with the type of loan program, quality of your credit status, or type of property, you should plan on paying an average of 2 to 3 percent of the purchase price.
You may not want to hear this, but there are still other costs associated with buying your next home... inspectons!