Everyone has heard of the ‘dreaded’ Closing Costs. Fear enters the process given the perceived – and oftentimes – actual uncertainty as to what these Closing Costs might be, especially for first time buyers. On top of this, the final amount is often disclosed to the buyer only a couple of weeks or even days before the scheduled Closing Date.
With this in mind, I wanted to share a list of typical Closing Costs, and at least equip the reader to ask the right questions of the professionals involved in their transaction:
- Interim Interest This is interest accrued on the mortgage for the number of days remaining in the month of the Closing and will typically be ‘credited’ to the seller if these have been prepaid.
- Mortgage Tax In Westchester (except for Yonkers), for a 1-2 family dwelling, the rate is 1.3% minus the $30 residential fee exemption. The rate for Yonkers is 1.8%.
- Origination Fee This is a fee paid at the time the mortgage application is processed.
- Private Mortgage Insurance (PMI) A premium paid by the buyer to insure the lender if the buyer is borrowing more than 80% of the appraised value of the home.
- Tax and Insurance Escrows Lender required funds deposited by the buyer into an escrow account, to be used by the bank to pay the taxes and insurance to cover a certain number of months to be determined by the lender. This is not strictly speaking a ‘cost’ of purchasing property, as it is money that would have to be paid by the Buyer in any case, but it is included here because the buyer often has to provide this money at the time of the Closing in advance as one of the conditions to receiving the loan amount.
- Appraisal Fee A fee for appraising the value of the property.
- Lender’s Attorney’s Fee Even though the buyer typically pays the lender’s attorney for reviewing the title to the property, resolving any title problems, coordinating the closing, typing the bank papers, attending the closing, dispersing the funds at closing, and ensuring the documents are accurate and properly recorded, the Lender’s attorney represents the Lender’s interest not yours. This is typically a flat fee which you will not be able to negotiate but for which you are still responsible.
- Buyer’s Attorney’s Fee This is for your own attorney representing your interest with whom you negotiate the fee. This is usually a flat fee negotiated in advance of the representation.
- Credit Report Fee A fee for investigating the borrower’s credit rating.
- Homeowners Insurance Policy – An insurance policy listing the lender as the loss payee. The buyer is required to bring a paid receipt for this policy to the closing. Cost will vary according to the type of coverage and insurance company.
- Mortgage Recording Fee A fee paid to the county clerk’s office for mortgage documentation. These fees are usually fixed and do not vary significantly.
- Title Insurance A one-time charge to the buyer for insurance that guarantees compensation if the title should prove to be defective (e.g., if the previous owner had a tax lien on the property). Two types of insurances they provide include (a) the required coverage of the lender and (b) the strongly recommended coverage of the buyer. If purchased together, title insurance companies typically provide a hefty discount, so it makes sense to purchase both together. Title insurance premiums also not vary significantly from company to company given that they are strictly regulated by the State.
A few days prior to Closing, your lender will provide you with a draft of what is called a Closing Disclosure (or “CD” for short) for your review. This document sets out all your closing costs. You may receive additional drafts of the CD with adjusted costs until a final version is reached. The above, although not an exhaustive list, are most of the important costs which are included on this CD and may vary according to total purchase price of the property or the mortgage amount.
While, you may not know the final Closing Cost figure until quite late in the process, you may be able to at least establish the categories of Closing Costs that will apply to your transaction, and this might be enough to ease some of the anxiety.