CLOSING COST, A BIG MYSTERY?

Let's me ATTEMPT to clear up this mystery somewhat. Closing cost are a term you will surely hear when you go to buy a home, yet it is mostly misunderstood. Cost paid at closing by either the buyer or seller are commonly called "closing cost". These include approximately seven groups of cost to be paid by either the buyer or the seller, Here are the seven groups and a simiplified explanation of each and who has to pay each cost.

SALES/BROKERAGE COMMISSIONS: This is a cost the seller must pay because the seller has contracted with a Real Estate broker for assistance in selling the home. This normally runs from 5-7% of the sale price but can vary according to the contract the seller has signed with the listing broker. This is not negotiated by the buyer, it is between the seller and the seller's broker.

ITEMS PAID IN CONNECTION WITH THE LOAN: This is the cost of making the loan to buy the property and is charged by the lender. This is a portion of true closing cost and, believe it or not can be negotiated between the lender and the borrower, though this is rarely done. Most buyers simply accept what the lender offers. These cost consist of several "fees" the lender charges and is mostly "profit" for the lender to initiate the loan. These can consist of some, or all, the following fees: Loan Origination Fee, Loan Discount Fee, Appraisal Fee, Credit report, Inspection Fee, Mortgage Insurance Application Fee, Undrwriting Fee, Document Preparation Fee, plus whatever new ones the lender can add to increase his profit. The buyer is responsible for these fees but the seller is allowed to contribute to these cost.

ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE: These are simple and usually consist of three items. Interest from date of closing to the first of the following month, Mortgage Insurance Premium, Hazard Insurance Premium (better know as Home Owners insurance). Once again these cost are the responsibility of the buyer but the seller is allowed to contribute to these cost (excluding the interest).

RESERVES DEPOSITED WITH THE LENDER: Usually referred to as "prepaids", these cost are the buyers responsibility and normally the lender will not allow the seller to contribute to these cost. These cost consist of a few months of Home Owners Insurance, Mortgage Insurance, Property taxes, and in some cases Annual Assessment ( for condo and HOA fees). If the buyer is having to pay any of these fees into escrow with the lender they are included here. For the lenders protection, the lender wants to be sure when the Property Taxes, Home Owners Insurance, and Mortgage Insurance come due they have enough of the buyers cash on deposit to make these payments even if the buyer is behind in the regular mortgage payment which includes 1/12th of these cost. The Goverment controls exactly how much of the buyers money the lender can hold so there is a very complicated formula used to compute the exact amount. It approximates an extra 2-3 months of premiums for these items.

TITLE CHARGES: These consist of as many as 10 or so, charges, plus any the lender can get away with adding. Basically these assure the lender and the buyer that the property has a clear title so ownership is not in dispute. These fees include Title Examination, Title Insurance, Attorney Fees, Tax search, Notary Fees, plus the lender may add Document Preparation, Courier Fee, etc. These are the responsibility of the buyer but the seller is allowed to contribute.

RECORDING AND TRANSFER CHARGES: These are somewhat smaller fees charged by the state or county for taxes, recording the sale and new title. Parts of these fees are the responsibility of the seller and parts are the responsibility of the buyer. The seller must pay the transfer tax, and the mortgage release fee. The buyer is responsible for the recording fee and mortgage fee but the seller is allowed to contribute to the buyers fees.

ADDITIONAL SETTLEMENT CHARGES: This is a coverall for anything not included in the other groups and may include payments to a pest control company for a termite letter, charges for a survey if required, and the lender will usually add charges for "post-closing fee", "recording/processing fee", etc. More profit producing fees for the lender. These can be the resonsibilty of either the seller or buyer depending on who incurred the charges. If any are the responsibilty of the buyer then the seller is allowed to contributre.

WOW, this is really a mess and very hard to understand, but you can blame the good ole US goverment for the mess. It is intended to fully inform both the buyer and the seller of all the cost involved in the transaction. And you know, if our goverment gets involved, it is going to be confusing even with very best intent. Hope this helps you have some understanding of the "closing cost" on a real estate sale.

Just as a point of interest, "closing cost" excluding the real estate commission will usually run around 3% ($3000) of the sale price on a home selling for $100,000. The cost go up numerically with the cost of the home but because some fees remain the same for any priced home, then the higher priced the home, the lower the cost will be on a percentage basis. In other word a $200,000 home would not cost $6000 in closing but closer to $5500, etc. It is obviously more complicated than what I have explained here, but I want to keep it as simple as possible. A good agent will be able to go over this with you in more detail. You can find out an approximation of these cost in advance by asking your loan officer for a "Good Faith Estimate", which you should request from each lender you are considering. The Good Faith Estimate is supposed to spell out these cost as required by goverment regulation, but sometime the lender will lowball this estimate, intentional or by design, you decide. Phil