Although no two real estate transactions are alike, they pretty much all have one thing in common–hefty settlement costs, also referred to as closing costs.
In addition to shelling out the required down payment, home buyers can expect to pay an extra 3 percent of the home loan amount in costs to parties involved with the transaction. On a $100,000 loan, this can amount to $3,000.
For those who have never purchased real estate, these costs are sometimes a shock, as the buyer realizes the extent to which they will impact the sale only after a home has been picked out. This can be a pretty hard pill to swallow for first-time buyers scraping to make a down payment.
Due to regional differences in real estate business practices, it is extremely difficult to specify what costs a home buyer can expect to pay for a particular purchase and how much each individual cost will be. Lenders may also have their own names for certain costs, adding to the confusion.
Luckily, when you apply for a mortgage the lender is required by law to provide you with a good faith estimate of what your closing costs are expected to be. Although this will only be an estimate, any quality lender/broker should be able to estimate pretty exactly what your actual costs will total.
Here is a list of typical costs you can expect to pay when buying real estate:
– Transfer tax. This local government fee is required to transfer the title and deed into the new owner’s name. The fee is charged as a percentage of the sales price and is likely to vary widely, up to 10 percent, depending on the property location.
– Recording fee for the deed. This money is for the county to record the changes in the deed and mortgage information, typically $10 to $50.
– Pro-rated real estate taxes. Real estate taxes are used to maintain schools and other public functions of the local and county governments. The tax amounts will vary depending on the property location. The buyer will either be charged or credited a portion of the annual property tax at the loan closing, depending on the date of the closing and when the last time the seller paid property taxes.
– Mortgage lender’s expenses. Included is the application fee, which typically runs about $350. The application fee usually pays for a credit report on the borrower (about $50) and an appraisal on the property to verify value (around $300). If a lender does not charge an application fee the credit report and appraisal fees likely will be charged separately.
– Points. The term “point” is used in the lending industry to refer to costs as a percentage of the loan amount. One point equals 1 percent of the mortgage amount. For a $100,000 loan, one point would equal $1,000. Origination fees and loan discounts are fees often expressed in terms of points.
– Loan discount fee. Borrowers can lower the interest rate on their mortgage by paying a discount fee. Lenders commonly refer to this practice as paying discount points. The amount of points the borrower wishes to pay (if any) will determine this cost.
– Origination fee. This is the fee charged by the lender/broker for the service of extending financing. This fee may be used by the lender to cover costs or may be used for commission purposes. It is common for lenders to charge one point for this fee.
– Brokerage fee. A mortgage broker may charge an additional fee (in terms of points) for finding a lender to extend a mortgage loan to the borrower. If you already are paying an origination fee you should be able to avoid this fee.
– Document preparation, processing and underwriting fees. These are used to cover the costs involved with preparing the vast amount of paperwork required for closing. The fees can vary widely depending on the lender. Some consider these to be “junk” fees because the money goes for administrative costs. If such costs appear, the buyer is well advised to try to negotiate to keep the tab down.
– Title search. This is either done through an attorney or a title company, to guarantee that there are no liens or lawsuits against the property. The fee, usually around $350, may be included with attorney’s fees, which themselves can run $300 to $900.
– Closing fee. If the closing is to take place at a title company, the it will charge for the use of its office space.
– Survey. This is done to verify the exact boundaries of the property. It typically costs $200 to $300.
– Inspections. These are customarily done to search for pests, termites, water damage or other defects and might cost $50 to $100.
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Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill., 60611.
