by Brian Burke
on Monday, November 19th, 2018 at 10:43am.
How to Budget for Closing Costs
Buying a home is a process that can be described as funnel-like in some ways. Deciding to get into home ownership and looking at potential homes places buyers at the wide top of the funnel. Closing on a home is the culmination of the process and takes place takes at the thin, bottom spout.
Everything that takes place from the initial foray into real estate until it is completed heads the buyer towards closing. What exactly is involved in closing and what costs should be expected? How and how much should you budget for closing?
What is Closing?
There are many processes and individual parties and vendors involved in the sale of the home. This is, in part, what can make the process a bit complicated and sometimes confusing. When it boils down to it, closing is the day, date and time when a property transfer takes place.
What is Involved in Closing?
Closing centers around the buyer and seller but involves many parties. These can include banks and mortgage companies, title insurance and transfer companies, insurance providers, attorneys, real estate agents and more. Closing not only involves multiple parties but it includes plenty of paperwork and the transfer of funds. At closing, real estate agents are paid, there is a transfer of funds between mortgage holders, taxes are paid and sellers receive their net funds. Insurance coverage is verified as is the home's value. Depending on the circumstances surrounding the sale there could be a variety of other factors involved.
The Costs Associated with Closing
The exact costs of closing on a property will depend on the specific property and circumstances involved. Since a significant portion of closing costs are tied to the value of the property being sold, the more expensive a property is, the higher the closing costs. Most real estate professionals will suggest that 2-5% of the total purchase price should be budgeted for closing costs.
What Fees are Involved in Closing?
The list of potential factors involved in a closing can include:
Loan Application Fee - This is a fee the bank or mortgage broker may charge to process the loan.
Appraisal Fee - This is paid to a professional appraiser who provides a written valuation of the property involved to the company financing the loan.
Closing or Escrow Fee - This is paid to the escrow company or title company for conducting the closing.
Escrow for Property Taxes & Mortgage Insurance - Many times, the first couple of months of mortgage payments and taxes will be required to be deposited.
HOA Transfer Fees - If the property is governed by a homeowners association, fees must be current. It also provides the buyer an opportunity to judge the financial strength of the HOA.
Homeowner's Insurance - Often a year of premiums for homeowners insurance is required at closing.
Title Insurance - This validates the lien for the mortgage company.
Loan Origination Fee - This is a fee paid to the lender, usually amounting to about 1% of the loan amount.
Pest or Termite Inspection - This assures the lender and owner the property has not sustained damage due to dry rot, termites or other pests.
Private Mortgage Insurance - If there is less than a 20% down payment, a lender will often require Private Mortgage Insurance. Usually, at least the first month's premium for PMI is due at closing.
Property Taxes - Lenders will want to ensure that property taxes are paid and at least current at closing.
Recording Fee - This is a fee normally paid to a city or county recorders office to file paperwork on the property in county or county records.
Some of the fees listed above can often be rolled into the mortgage. A professional real estate agent can be extremely helpful in assisting to compile what closing costs are applicable in each property transfer. This is invaluable in helping those responsible for the fees to better prepare for their payment.
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Brian Burke | Broker | ePRO | Expert | 303.955.4220 Office | 303.710.2609 Direct | Brian@kennarealestate.com