Home Buyer’s Guide to Understanding Closing Costs INTRODUCTION FINDING YOUR DREAM HOME IN YOUR PRICE RANGE CAN BE A TASK. Sometimes we have Bentley desires on a bicycle budget. When that happens, every dollar counts. The last thing you want is a surprise at closing. Because of the TILA/RESPA Integrated Disclosure (TRID), you’ll have a cost estimate three days after you apply for the loan and again right before closing but you may be wondering, What are all these extra costs? Exactly what am I paying for? This eBook will help you understand where your money is going and why these line items are important. It will also give you some insights as to where you can save money and what costs are optional. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT ARE CLOSING COSTS? You’re paying for the home. You may be paying to renovate it. All of these expenses go into buying a home but they fall outside of the realm of closing costs. Closing costs are fees associated with the home purchase and loan and are paid at the closing of the real estate transaction. At the closing, the title of the property will be transferred to you (the buyer). Some of the fees that go into closing costs are: • Survey fee: to survey the land to verify • Document or transaction stamps property lines. This is not required in all states. (required by law) and/or notary fee. • Origination fee: covers the lender’s • Title service fees: this includes the cost administrative costs. Some mortgages will of the title search and insurance (which offer no origination fee as an incentive. will be covered in more depth later). • Appraisal fee: this is paid to the appraisal • Attorney fees for preparation of the company for establishing fair market value. documents, if applicable. Lenders will not provide a mortgage without it. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 • Courier fees: these fees cover transporting of • Homeowners’ association dues, as applicable. documents or payoffs. • Pro-rata tax, as applicable. • Recording fee: charged by the government in order to record the change of ownership. • Prepaid interest. • Inspection fees to inspect the property. • Flood certification fee (very important in Florida). • Home warranty to insure the mechanicals of your home continue to run well. • Pest inspection (another good idea in the Sunshine State). • Private Mortgage Insurance (PMI) for buyers who are not putting at least 20% down. • Credit report fee: your credit score will determine your interest rate so this is an • Homeowner’s property insurance, pre-paid for essential part of the process. a year to build the escrow account. This is one of the closing fees you’ll want to shop around. • Bank processing fee. Insurance rates can vary greatly. However, Florida is often limited in homeowner’s • Real estate agent or brokerage property insurance options. commission on the sale. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 Your mortgage professional can help you understand how some of these home buyer closing costs such as interest, taxes, and homeowners’ association fees may vary based on what time of year you close. If you close on your home closer to the end of the year, you will be paying a larger portion of them since they are prorated and paid in advance. If you close earlier in the year, the numbers associated with these expenses will be smaller. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHO PAYS CLOSING COSTS? Closing costs can be paid by the buyer, seller, or a combination of both based upon the agreement reached between the buying and selling parties. In Florida, the buyers often pay the largest number of fees, but the sellers pay a higher price because they’re usually issuing the commission payment to the real estate agent. This is not the case in every state. In some states, it is common to request that the seller pays all of the closing costs or several thousand dollars towards it. This request becomes part of the negotiation process. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 CAN YOU NEGOTIATE OR SHOP CLOSING COSTS? Closing costs can be negotiated with the seller as to who will pay for what. Sometimes when a seller will not move on the price of the house, a buyer will ask that closing costs be paid instead. This is a wise move on the part of the buyer because a reduction in the selling price, unless it is a large one, may only mean a few dollars savings a month over the course of a 30-year mortgage. On the other hand, $5,000 towards closing is $5,000 the buyer doesn’t have to pay at the time of the purchase. But there are also some parts of closing costs that are negotiable because you can select which service provider will give you the best deal. For instance, since home inspections are sometimes rolled into closing costs, you can save some money by shopping around for an inexpensive inspector. If you required more than one inspection, as in the case of wanting a second opinion, you could negotiate with the seller to cover one of them. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 Title insurance costs vary by state. In some states, like Florida, title insurance premiums are regulated so the fee is fixed. But you can shop around to find a title company you want to work with. There may also be a cost-savings from one title company to another as their fees may vary. Your real estate agent or lender may have suggestions on title companies but often those suggestions are based on affiliations they have with the company. There is nothing in the law that requires you to select their title insurance company recommendation. This is a decision you can make on your own and one that may save you money if you compare fees. Here’s what you should know before selecting a title agent. Another area that can increase your closing costs is administrative and processing fees on behalf of your lender. Some lenders offer incentives such as lower fees or no origination fees. If you want to cut your closing costs, comparing lenders is a good idea. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 DO CLOSING COSTS VARY FROM STATE TO STATE? Closing costs do vary depending on the state in which the transaction occurs. In Florida, it’s typical for closing costs to equal between 2-5% of the purchase price of your home. Buyers will typically pay more line items, but often less total cost than the sellers. As previously mentioned, the sellers usually pay the commission on the sale so their closing costs are higher. For an average $150,000 home, buyers will generally pay between $3,000-$7,500 in closing costs depending on options selected and points negotiated with the sellers. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 According to BankRate.com the most expensive states to close in are Hawaii, New York, North Carolina, Delaware, and South Carolina. You’ll save some money if you purchase a home in Pennsylvania, Wisconsin, Kentucky, South Dakota, or Oklahoma. At least three business days before you close, your lender will give you a Closing Disclosure statement that will enumerate the closing fees. Go line by line in order to understand them. Compare it to your original loan estimate that you received at the time of being approved for your mortgage. While those numbers are not required to be exact, some will change between the time you applied for the loan and the time you close, but they should be similar. If they aren’t, and you’re not happy with them, you don’t have to sign. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WAYS TO PAY CLOSING COSTS There are several ways to pay your closing costs: • Bringing a cashier’s check to closing to cover your portion. • Negotiating with the seller to cover your closing costs. • Selecting a no closing cost option. Don’t Think You Own. Be Sure. www.BNTC.com Call us at 727.449.8733 WHAT’S A NO CLOSING COST MORTGAGE OR NO CLOSING COST FINANCING? If you want to avoid closing costs entirely you can look for a no closing costs mortgage but understand that there are costs associated with a closing. If the lender “absorbs” them for you at the time of closing, you can assume they will show up somewhere else. While you won’t have to bring a check to closing, you will be paying for closing in other ways. This can take the form of a higher interest rate on the loan or the lender may add your fees into the mortgage itself. If the latter happens, you will be paying interest on the fees associated with the closing, adding to the amount you pay in the long run. Still, for those who don’t have several thousand dollars in cash that can be quickly tapped, this can be an attractive option. Don’t Think You Own. Be Sure.