One of the most common questions home buyers ask once they have decided to purchase a new home is, " What are the closing costs?" The answer home buyers receive to this question is more often than not incorrect, incomplete and misunderstood. Why is this question answered incorrectly so often by many "professionals"? Why, when discussing a specific purchase transaction, does a home buyer frequently get closing cost estimates varying by thousands of dollars? Which is correct? This page attempts to clear up the misconceptions that exist and explain each cost, one by one. It will also expose some of the "tricks" mortgage lenders use to make their closing costs appear attractively low.

1. What are Closing Cost?

   Lender Closing Fees

   Application, Appraisal, Credit Report and Processing Fees

   Tax Service Fees

   Bank Attorney, Escrow Agent Fees

   Points

    

2. Title Charges

   Title Search

   Title Insurance

   Mortgage Tax

   Survey

   Recording Fees

    

3. Pre-Paid Items

   Per Diem Interest

   Home Owners Insurance

   Private Mortgage Insurance

    

4. Escrows

   Real Estate Taxes

   Home Owners Insurance

   Private Mortgage Insurance

    

5. Other

   Your Attorney

   Engineer/Property Inspection

   Termite/Pest Inspection

Just What Are Closing Costs?    Top

Depending on who you ask, even the definition of closing costs can vary. However, as far as most home buyers are concerned, they define their closing costs as, " any and every expense I will incur from the moment I agree to purchase this house to the moment I am handed the keys at the closing". This is the definition we will use in this discussion.

Did you know that when discussing a specific mortgage transaction, if the lender is honest, closing costs will not vary more than a few hundred dollars from one lender to another? That’s worth repeating; closing costs should be virtually identical from lender to lender. As a matter of fact, are you aware that the vast majority of "closing costs" are not bank charges at all and have nothing to do with the lender you choose? Since the type of costs associated with buying a home are somewhat unique from State to State, we will concentrate on New York, specifically Long Island and the New York City metro area. "Closing costs" are quite often grouped into the following categories: Closing Costs, Title Fees, Prepaids, Escrows, Adjustments and Other.

Application, Appraisal, Credit Fee and Processing Fees:     Top
When you apply for a mortgage, regardless of whether you apply to a big name bank, mortgage banker or mortgage broker, each will charge some combination of the above fees. Some lenders charge separately for appraisal, credit, processing, express mail, etc.  Yet others simply charge a flat application fee that covers all. If you were to total these individual fees and compare them to an application fee that covers all, the costs should be reasonably close to each other. NOTE: For some applicants, mortgage lenders may require additional paperwork to be done at an additional expense. For example, self employed business owners may incur an additional expense for a business credit report or Dunn & Bradstreet report.

Tax Service Fee:     Top
Mortgage lenders will very often require that borrowers pay their real estate taxes and/or homeowners insurance monthly as part of their mortgage payment. As the borrower makes mortgage payments throughout the year, the portion alloted to taxes and/or insurance is deposited into an "escrow account" or holding account. When the real estate taxes and/or homeowners insurance is due to be paid, the bank then pays it with the money that has been accumulating in the escrow account throughout the year. To set up these accounts, monitor them for the life of the loan and insure the escrows are paid when due, the banks often hire a tax service to assist them. They charge a one-time fee of approximately seventy-five to one hundred dollars. (See Escrow section for more details.)

Bank Attorney/Escrow Agent :    Top
In addition to both the buyer and seller being represented by an attorney at the closing, the bank will also have counsel present. The bank attorney will prepare and review closing documents as well as insure that the lender’s interests are being represented. It is the purchaser’s responsibility to pay the bank attorney’s fee, which generally ranges from $450.00 to $550.00.

Points:    Top
Points are "prepaid interest" calculated as a percentage of the loan amount. For example, one point on a $150,000.00 mortgage is equal to $1,500.00. Very often, borrowers have the option of paying points to "buy down" the interest rate . In many circumstances, it is advantageous to pay points in order to obtain a lower rate. To determine whether paying points would be to your advantage, your mortgage professional should do an analysis of your particular transaction and situation and explain your options.

Title Fees   

Title Search:     Top
Almost every property has a history of ownership outlined in local public records. When a property is purchased, this history is reviewed to assure that the current seller "has good title" or, the right to sell the property. The title search will reveal any liens from a creditor or third party as well as search for property violations or missing certificates of occupancy. Your attorney will most likely have an "abstract company" (a company that performs title searches and related tasks) of preference and will order your title search from them. An entire search of a typical property on Long Island or within the five boroughs of New York City will generally cost about $300.00 to $500.00 .

Title Insurance:    Top
Unfortunately, property records may not disclose all possible title problems or claims. When doing a title search, a lien against the property may be missed. Because of this possibility home buyers are required to purchase title insurance. Title insurance will protect the borrower and the lender from suffering a loss should a lien or claim be discovered after the closing. Title insurance companies and premium rates are regulated by the State of New York. However, the quality of the work performed and the financial health of the companies can vary. For any given purchase price and mortgage amount, there is a set insurance premium due. Unlike most other forms of insurance, the premiums are a one-time fee paid at the closing. Once paid, the new homeowner is protected for as long as he owns the property, whether that be five years or five hundred.

NOTE: When discussing closing costs, some lenders may "under estimate" the title insurance premium in an attempt to make the total closing costs appear lower than they actually are. Remember, title insurance premiums are set by New York State and CAN NOT vary from lender to lender.

New York State Mortgage Tax:     Top
 This expense is part of the recording process and is a state tax. When obtaining a mortgage within the five boroughs of New York City, your share of the mortgage tax amounts to 1.75% of the mortgage amount minus $25.00. In Nassau and Suffolk Counties, it is 0.75% of the mortgage amount minus $25.00. This expense is paid at the closing. The lender pays 0.25% of the mortgage amount.

Survey:        Top
A survey is a map of the property and the structures situated on the property. In order for the abstract company to insure clear title to the entire property, a survey will be required to show, among other things, that the property lines are actually where the buyers and sellers believe that they are and that any structures on the property (pool, deck, extension, etc.) are situated within the property lines. A new survey on a typical property in the New York City metropolitan area can cost approximately $400.00 to $600.00. If there is already a survey in existence, the abstract company may be able to use that in lieu of ordering a new one and do a survey inspection instead.

NOTE: Some lenders may not mention a survey on their Good Faith Estimate of closing costs at all! Remember, only the abstract company (who is doing the title search) can decide whether or not a survey is required.

Recording Fees:     Top
After the closing takes place, the abstract company will record a new property deed at the local county clerk’s office, making it public record that the property is now owned by the new purchasers. In addition, a new mortgage will be recorded making it public record that the lender holds a lien on the property. The local county clerk’s office charges to record each document. The total charges could be approximately $150.00 to $200.00 depending on the number of pages.

Homeowners Insurance:        Top
 A few days prior to the closing, the home purchaser will be required to secure a homeowners insurance policy on the subject property. Homeowners insurance protects both the new homeowner as well as the mortgage lender against a loss due to fire, and certain other kinds of damage. It also protects the homeowner against potential liabilities such as someone tripping on your sidewalk or slipping on the ice in your driveway. Typically the purchaser may secure the policy from any insurance company he or she chooses. The costs for such policies will vary from company to company and will be dependent on the types of coverage you decide to purchase.

Per Diem Interest:       Top
Also known as "prepaid interest", this expense is based on the day of the month the closing takes place. Once the mortgage money from the lender is received (at the closing), the lender charges interest from that moment on, until the entire balance is paid off at the end of the term. Since mortgage payments are due in arrears (your mortgage payment covers the month that just past), the lender will pick up at the closing the interest due from the closing date through the last day of the month. For example, if the closing takes place on January 10th, per diem interest will be due at the closing to cover January 10th through January 31st. The first mortgage payment would then be due March 1st, with the payment covering the month of February.

NOTE: Many lenders, in an attempt to make their "closing costs" appear lower than the competition, may only disclose on their Good Faith Estimate five or ten days worth of interest. This would appear to make that lenders "costs" lower than a lender who discloses the maximum of thirty days interest. Since it is impossible to know ahead of time what day of the month the closing will actually take place, its best for the buyer to budget for thirty days worth of prepaid interest. That way, it will be impossible for him or her to be "caught by surprise" and be short of funds.

Private Mortgage Insurance    Top
Buyers who make down payments less than 20 percent of the value of the house may be required by lenders, and by law in some states, to take out mortgage insurance. The policy covers the lender's risk in the event the buyer fails to make the loan payments. Premiums are typically paid annually from an escrow or reserve account, or in a lump sum at closing

Escrows      Top

Real Estate Tax Escrows:        Top
 Depending on when during the tax period you close, at the closing table, the bank will collect from one to four months worth of real estate taxes to start out the escrow account. This is done to ensure that the bank will have enough money in the escrow account to pay any tax bill when it is due. (See Tax Service Fee for more details.)

Insurance Escrows:         Top
At the closing table, the bank will collect approximately two months worth of homeowners insurance to start the escrow account. This is done to ensure that the bank will have enough money in the escrow account to pay the insurance premium when its due to be renewed. (See Tax Service Fee for more details.)

Adjustments     Top

Adjustments are not "fees" like many of the expenses already discussed. Nevertheless, it is an expense purchasers will incur at the closing. Adjustments can arise from real estate taxes that the seller has already prepaid or that may be due. Adjustments may be made to cover heating oil left in the storage tank that the seller has paid for. Basically, the buyer will be required to reimburse the seller for any service or utility that the seller has paid for and the buyer will now be using or getting the benefit of.

On the other hand, adjustments are not always an expense to the buyer. It may take the form of a credit from the seller. For example, on a final walk through inspection prior to closing, the buyer may find that the stove (which was included in the purchase) is no longer working. The seller may be required to "credit" the buyer with enough money to repair or replace the stove.

NOTE: Since these expenses would be impossible to predict more than a day or two before the closing is actually scheduled, most lenders will not even disclose this item on their Good Faith Estimate! However, it is feasible that adjustments can turn into a "few thousand dollar surprise" that the buyer must pay at closing. Be sure to discuss this with your attorney or mortgage professional ahead of time so any possible adjustments may be anticipated.

Other     Top

Purchaser’s Attorney Fee:      Top
When choosing an attorney to represent you, recommendations are often useful. Be sure the attorney you choose specializes in real estate. Choose an attorney as you would choose a doctor; you wouldn’t want a podiatrist performing open heart surgery on you. Nor would you want a trial attorney, matrimonial attorney, tax attorney or a general practitioner who doesn’t specialize in real estate, handling your real estate transaction. On average, most real estate attorneys charge between $800.00 and $1,000.00 to handle your purchase, more for complex transactions or if additional work is required. Be careful when choosing an attorney based on his fee alone! You get what you pay for! An extra hundred dollars for a good attorney is well worth the time and aggravation you otherwise may incur using a "bargain basement " attorney.

Engineer/Property Inspection:     Top
Sometimes called an "engineer’s report", an inspection is done by a professional home inspector or engineer. He advises the borrower as to the current condition of the property. An inspection will show the status of the property’s major systems such as heating, plumbing, and electrical. It will tell you about the roof and exterior. Any structural problems should also be uncovered during the inspection. The inspection is typically done prior to signing the sales contract, since any faults uncovered may affect the buyers decision or offer. The cost of such an inspection can vary from $300.00 to $600.00.

Termite Inspection and Warranty:     Top
A termite inspection (usually performed by a licensed exterminator,) will check for the past or current presence of termites or other wood-boring insects. As with the property inspection, this information may affect the buyer’s offer to purchase the property. If termites or termite damage is detected, the seller would normally be required to correct the damage, exterminate the insects, and provide a warranty (usually one year) against further infestation. On average, a termite inspection will cost less than $100.00.

NOTE: Since mortgage lenders typically don’t demand that you have an attorney or whether you have a property or termite inspection performed, these expenses are rarely mentioned on Good Faith Estimates. Never-the less, it would be foolish for any home buyer to not use an attorney or have these inspections done.

After reviewing all of the above expenses outlined in each category, it should be apparent that the only fees that can vary from lender to lender are those in the first category ("Closing Costs"). One lender’s application fee may be $600.00, another may charge $550.00. One bank attorney may charge $450.00, another $500.00. At most, the differences would add up to a few hundred dollars. Some of the "Title Fees" are based on the Abstract company you use, the rest are set by New York State and the local county government. The lender cannot change these fees. The "Prepaid" items are based strictly on which homeowners insurance company you use and the day of the month you close. Your "Escrows" will be the same regardless of which lender approves your mortgage and as for the "Adjustments" and "Other" charges, they have absolutely nothing to do with the bank you choose.

Why then do estimates of closing costs vary so much? Quite simply, many lenders utilize the "tricks" we previously discussed in order to make their closing costs appear lower than the competition. Unfortunately, since most people are not experts when it comes to real estate transactions, they "fall for the bait" and apply to the lender that appears to "have the lowest closing costs." Unfortunately, these same people get the surprise of their life when at the closing, they have to spend thousands of dollars more than they originally expected.

Many home buyers will try to gauge their closing costs based on the experiences of friends and family. Sadly, this often results in more misinformation and confusion. "My Uncle Louie said when he purchased his house, his closing costs were only $3,000.00. Why are mine so much more?" It may be that "Uncle Louie" bought his house in 1978 when the cost of both real estate and closing costs were less. "My best friend just bought a house last month and his closing costs were so much less. Why?" Your best friend may have purchased a house that was half the price of yours. The price of the house and size of the mortgage are factors in calculating closing costs. You say his purchase price and mortgage amount were similar to yours? Its possible that he financed some of the closing costs into his mortgage. Maybe he decided to pay zero points. Maybe he was just mistaken and his cost were similar to yours. Many homeowners, after closing, are still unclear as to what their exact closing costs were.

For an accurate estimate of your closing costs, talk to your real estate attorney or call Home Financial Services.  You will always get straight, accurate answers to all of your mortgage questions. If closing costs are a concern to you, we can negotiate on your behalf to have the seller or even the lender pay some of the closing costs. Let our experience benefit you.