As seen for most of the investors, buying a real estate property is quite uncommon, as engaging oneself in a real estate transaction, either be it buying or selling just once or twice, makes it little peculiar for remembering the entire process. Further, there are mountains of paperwork to sign, and a host of fast-talking salespeople, to interact with.
As such, somewhere between the elation of purchasing property and boredom of signing forms, it’s quite easy to lose track of what you are paying for, and how much you’re spending. Aside from the mortgage, most other expenses get lumped into the category known as closing costs.
What are Closing Costs?
As the name suggests, these closing costs are nothing, but the fees and expenses you pay when you close on your house, beyond the value of the property.
Hence, paying attention to these costs, before you get the closing, is essential to know where your money is going, and can even save you a few thousand rupees.
The Most Common Types of Closing Costs for Buyer
These are the closing costs, which vary from lender to lender. For example, some lenders make mortgage borrowers pay for the discount points to reduce the interest rate, while others do not. The borrowers are entitled to and encouraged to shop around and compare the ‘Loan Estimates’ from the different lenders.
Some of the lender’s fees include:
These fees cover up the cost of processing your request for a new loan and include costs such as credit checks and administrative expenses. The application fees vary depending on the lender and the amount of work the lender must take while processing your loan application.
Loan origination fees
Loan origination fees is also known as the underwriting fees or administrative fees. The loan origination fees are a charge by the lender for the evaluation and your mortgage loan preparation. It covers the document preparation, notary fees, and the lender’s attorney fees. For such costs, you can expect to pay about 0.5% of the amount you intend to borrow.
By paying discount points, you reduce the interest rate you need to pay over the loan’s lifespan. The cost of one discount point is equal to 1% of the loan amount. Thus, if the loan amount is Rs 2,50,000, then a 1-point payment will be somewhat around Rs 2,500.
Prepaid or interim interest is the cost of borrowing money over the period between your mortgage closing date and the date of your first payment. Mostly, the lenders charge a prorated interest for each day from your closing date, until the end of the current month, based on the rate agreed upon on full term.
Either party can pay such type of value in the transaction. It is typically for the title search and title insurance but can also include other services. The title search is required to validate the property’s ownership, and the title insurance is necessary to cover any possible title-related problems down the way.
Private Mortgage Insurance ( PMI)
- It is a type of insurance that the mortgage lenders require when homebuyers usually put down less than 20% of the home purchase price. This PMI protects the lenders in case the home buyer defaults in the payment of the loan amount. As such, when you are under PMI, you will need to pay an extra fee every month in addition to the mortgage principal, interest, and taxes thereon. However, if the loan documents indicate that you have built up equity equal to at least 20% of the home value, you will be freed from paying the regular PMI.
Various charges come related to the property induced by the home inspectors and other service providers, to the closing costs. Many of these third-party fees against the property are relatively small, yet together can add up to thousands of rupees. As listed on each lender’s ‘Loan Estimate’, some of these services can be looked around and compared between the different companies, while others tend to be fixed.
Some property-based fees include:
Appraisal and Survey fees
Appraisal fees are related to the increase in the value of the property. It is important because the lender wishes to know if the property is worth the amount you want to borrow. This can be for two reasons- one, the lender needs to verify the amount you need for the loan is justified or not, and the other is to make sure you can recoup the value of the home in case of default.
Home Inspection fees
This fee is made to the licensed inspector to evaluate the condition of the home. It is essential as some lenders require an inspection as an infestation inspection to verify that the property is in good condition. Further, the final inspections are done to check if some improvements are to be done or not meet the minimum property standards.
Property taxes are necessary to determine how much the Buyer and the seller are required to pay for the appropriated portions of the tax year. For such fees, buyers typically pay two months’ worth of the city and the country property tax at the closing costs.
Tax monitoring or Tax research status fees
This is a fee made to the third-party who keeps tabs on your property tax payments and notify the lender regarding any issue with your property tax payments, including late or failed payments.
If you own condos or are connected to the homeowners association, then you will be required to pay a yearly fee at the closing costs. Such costs are to be paid upfront in one lump sum.
Homeowners’ fees are paid monthly by the owners of a specific type of residential property to maintain or improve the properties. It usually includes transfer tax, home warranties, home-owners insurance premiums, etc. Although these charges are assessed annually, they are stored in an escrow account to ensure that the cash is in hand while making the payments. These types of escrow accounts can help lenders to reduce the borrower’s risk of lending money.
Some of the homeowner’s fees include:
Pet Inspection fees
As with a home inspection, sometimes, pet inspection is also done. In some states and government loans, this inspection is necessary. This is so because the repairs on termites or dry rots can be quite costly.
This tax is incurred when the house’s title is usually passed to the Buyer from the seller.
A home warranty can be understood as a service that covers the cost of repairing significant appliances or critical home systems on normal wear and tear. For example, if a homeowner finds difficulty financing Rs 4,000 for improving the air conditioner, having a home warranty can allow the homeowner to have their air conditioner repaired at a lower cost. However, the seller providing the security might cover some of the repair costs, depending on the policy. These home warranties are lumped up into closing costs for the real estate transaction and typically paid by the Buyer.
Escrow Property tax
Mostly, the government, in some cases, can place a lien on a house against the unpaid property tax or even foreclosure on that house. This is so because the lenders try to ensure that the borrower’s stay current on their taxes. Tax liens have priority over the mortgage liens so that the government can claim on the house before the lender. As such, an escrow account gives the lender a backup if you miss out on some tax payments, and thus, makes the property tax lien less likely to occur.
Home-Owners Insurance premium
Generally, your lender often requires you to purchase home-owners insurance before the settlement; as such, it can cover the property in case of vandalism, damage, and so on. Also, some of the condo associations do include insurance in the monthly condo fees. The amount may vary depending on where you live and what is your home value.
How to Estimate Closing Costs for Buyer?
Estimation of closing costs is usually done in case of loans or financing from a third party. As a result, on submitting the mortgage application, your lender will be required by law to give you a Loan Estimate (LE) within a few days. It is a three-page form that tells you all the relevant data about the loan you have requested, like monthly payment, estimated interest payments, total closing costs, etc. If you aren’t satisfied with receiving the LE, you need to clarify with the lender thereon.
Before your closing, you’ll receive ‘Closing Disclosure’, listing out your total closing costs. After that, you need to compare the Closing Disclosure to the LE you’ve received; you can also add up the fees mentioned above and see if any differences exist.
Further, you can also use a closing costs calculator for the estimation of your total closing expenses. If you haven’t been acquainted with this specific calculator, you can approach Timios. This innovative platform uses an interactive map for providing guiding help to you in lowering your closing costs.
Tips for Reducing the Closing Costs
Ask the Seller to sweeten the Deal
Some sellers might be willing to lower the home’s sale price to offset the sting of closing costs. At the same time, others may be willing to cover some of your closing costs. Thus, depending on the market and the seller’s motivation level, you can reduce the closing costs on your deal.
Close at the End of the Month
One of the easiest ways to reduce the value of closing costs is to schedule your closing date for the end of the month. Because when you close earlier in the month, you will be required to pay a per day interest rate for the number of days from when you close until the 30th. Thus, if you are closing on 29th, then you are only paying a one-day interest rate.
Negotiate Fees with the Lender
Once you’ve handled the fees, the lender wants you to pay, and so you can start negotiating and ask for a more hidden fee to knock off the final price. You can also ask the lender to give you the Closing Disclosure Form regarding the details of your final closing costs. As soon as you get it, you can compare what’s on the Closing Disclosure to the Loan Estimate and ask your lender to justify if any discrepancies are found.
The Closing Note
To be precise, it is to say that these are just some of the few closing costs included in the Buyer, while there are still many other costs. However, knowing closing costs can be beneficial at times, as such expenses are unavoidable when buying a real estate property.
Yet, taking proactive steps like shopping around and closely analyzing your Loan Estimate with your Closing Disclosure can add up and save big bucks on those fees.
So, as you start saving for a down payment, it is advisable to set aside enough money for closing costs.
Further, you can also connect with Assetmonk. This innovative platform offers asset growth with an IRR of 21% and value-added opportunity with superior property management for residential and commercial properties while ensuring that the residents experience the best living quality.
Closing Costs for Buyer FAQ's:
Application fees cover up the cost of processing your request for a new loan and include costs such as credit checks and administrative expenses. The application fees vary depending on the lender and the amount of work the lender must take while processing the loan application.
One of the easiest ways to reduce the closing costs is to schedule your closing for the end of the month. Because when you close earlier in the month, you will be required to pay a per day interest rate for the number of days from when you close until the 30th. Thus, if you are closing on 29th, you pay for one day the interest rate for.
Some closing costs included in lenders fees are – Application fees, Loan origination fees, Prepaid interest, Discount fees, Title fees, etc.
Some closing included in home-owners fees are – Pet inspection fees, Transfer tax, Home warranties, Escrow property tax, etc.