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*Home Ownership Made Easier, an extension publication of the Department of Consumer Economics and Housing, New York State College of Human Ecology, Cornell University, Ithaca, NY, 14853
Buying a home involves time, energy, and, most of all, money. In addition to committing yourself to mortgage payments for 15 to 30 years, you need quite a bit of money "up-front" to close the transaction that will make the house yours. There are several types of closing (or settlement ) costs and other up-front costs you should be prepared to pay. An estimate of the magnitude of these costs is in the table below, called Examples of Closing Costs.
One of the major up-front costs in buying a home is the investment time. The average household spends about 4 months house hunting and looks at an average of 20 houses before closing a deal. In addition to shopping for a home, you also spend time trying to find the best mortgage terms and an attorney who will assist you with the legal issues in purchasing a home.
How much time you spend looking for a home, a mortgage, and an attorney depends on your location. You will spend less time if you know what you want in a house and know much you can afford, and working with real estate agents will help narrow the choices. How many mortgage lenders are in your area? You can reduce time costs in mortgage shopping by keeping an eye on advertisements. Many newspapers run a summary of current mortgage interest rates offered by local lenders which you can follow up with a phone call and then a visit. How many attorneys are willing and able to help you close the deal on a home? You may want to ask friends, neighbors, or financial advisers for referrals to attorneys.
Financial closing costs are paid by both the buyer and the seller. In some areas, custom or tradition calls or the seller to pay for certain expenses and the buyer to pay for others. One way to minimize closing expenses is to negotiate some of them as part of the purchase offer. Some fees are set by law, and therefore are not negotiable. Others are set by the local real estate and financial markets and may be more flexible.
What Happens at Closing
Much of the paperwork involved in closing (or settlement) is done by attorneys and real estate professionals. You may be involved in some of the closing activities and not in others, depending on local customs and on the professionals with whom you are working.
Before you close on the house, you should have a final inspection, or walk-through, to make sure any repairs you requested have been made and that items which were to remain with the house (drapes, light fixtures) are still there.
At the closing, ownership officially is transferred from the seller to you. It may involve you, the seller, the real estate agent, your attorney, the lender's attorney, representatives from the title or escrow firm, and a variety of clerks, secretaries, and other staff. It is possible to have an attorney act on your behalf if you cannot attend the meeting (for example, if the house is in another state). Closing can take as little time as an hour to sign all the forms and transfer ownership or it an take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be set up).
In some states, settlement is done by a title or escrow firm to which you forward all the materials and information along with the appropriate cashiers' checks, and the firm will make the necessary disbursements. The real estate agent or another representative of the title company will deliver the check to the seller and the house keys to you.
Statutory costs are expenses you would have to pay to pay to state and local agencies even if you paid cash for the house and did not need to take out a mortgage. They include the following:
Pro-rated taxes such as school taxes, municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and large, bills.
Third-party costs are expenses paid to others such as inspectors or insurance firms. You would have to pay many of these expenses even if you paid cash for the house. Examples of third-party costs are as follows:
Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it pays to shop around for the best combination of mortgage terms and closing (or settlement) costs. You may have to pay the following charges:
Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer and the remaining cash down payment you make at closing. In addition to the deposit and down payment, other up-front expenses can include the following:
Depending on the purchase offer contract and contingency clauses, you may find you have some expenses immediately upon moving in. For example, suppose your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and the inspector determines that the house will need a new roof. You could negotiate to have the seller arrange for the work to be done, but this will probably delay the closing date--and you may have to agree to a higher price for the house or to cover some of the expenses of the new roof. Or you and the seller may be able to split the cost of a new roof, put on after you move in, using estimates from a contractor of your choice, each of you putting funds into an escrow account for the new roof. Or the seller may be willing to reduce the sale price of the house by an amount you think is fair. In either case, shortly after moving into your new home, you will need cash for a new roof.
The Real Estate Settlement Procedures Act (RESPA) contains information on the settlement or closing costs you are likely to face. Within 3 days of the time you apply for the mortgage, your lender is required to provide you with a "good faith estimate of settlement costs," based on his or her understanding of your purchase contract. This estimate should give you a good idea of how much cash you will need at closing to cover pro-rated taxes, first month's interest, and other settlement costs.
The act also requires lenders to give you an information booklet, Settlement Costs and You ( or "Buying Your Home"), written by the U.S. Department of Housing and Urban Development (HUD), which discusses how to negotiate a sales contract, how to work with various professionals (attorneys, real estate agents, lenders), and your rights and responsibilities as a home buyer. It also shows an example of the uniform settlement statement that will be used at your closing.
One business day before you close, you are entitled to see a copy of the Uniform Settlement Statement with your figures on it so you will know just how much the final costs will be.
Truth in Lending
Mortgage lenders are required to give you a truth in lending (TIL) statement containing information on the annual percentage rate, the finance charge, the amount financed, and the total payments required. For adjustable rate loans, the "total payments" figure is estimated as a "worst case" scenario. The figure represents the payments you would make if your loan adjusted upward to the maximum rate allowed by annual and lifetime caps and then stayed there for the duration of the loan.
The TIL statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. If you have an adjustable rate loan, it may outline the limits on the adjustments (annual and lifetime caps) and give an example of what your next year's payment might be, depending on interest rates.
Negotiate Savings on Closing Costs
There are several ways to make sure your closing costs are as low as possible, and they all involve negotiation.
Closing costs that are most likely to be negotiable, either with the seller or the lender, include application/origination fees, credit report fees, points, attorney fees (yours and the lender's), document preparation fees, surveys, inspections, money to the seller, and escrow funds from the seller (for cleanup, radon mitigation, and the like).
Since closing costs can be high, it pays to shop around and negotiate with the seller, your lender, and your attorney. The less you have to pay in closing costs, the more you can invest in the down payment on your house, reducing your mortgage costs.
Written by Jeanne M. Hogarth, associate professor, Department of Consumer Economics and Housing, New York State College of Human Ecology, Cornell University, Ithaca, NY; with assistance from Kevin Berkley, vice-president, Citizens Savings Bank, and the following Cornell Cooperative Extension agents: Eileen Donahoe, Marjorie Keith, John Nettleton, JoEllen Saumier, Martha Shortlidge, and Madelene Umscheid.
Examples of Closing Costs
The following examples of closing costs are based on purchasing $55,000 and $165,000 houses with a 9% down payment ($5,000 and $15,000). A likely range of fees is given. Not counting the down payment, closing costs can range from 4.5% to 17% of the amount of the mortgage loan.
Loan application fees and credit report
Loan origination fee (1%)
Points (1 to 3%)
Title search and insurance fees
Escrow deposit for taxes*
Partial month's interest
Plus Down Payment
$75 to $300
500 to 1,500
450 to 600
150 to 400
150 to 400
300 to 600
350 to 675
175 to 300
125 to 400
40 to 60
75 to 1,125
400 to 700
100 to 800
20 to 400
$3,335 to $8,660
$8,335 to $13,660
$75 to $300
1,500 to 4,500
450 to 600
150 to 400
150 to 400
500 to 800
750 to 1500
175 to 300
125 to 400
75 to 150
75 to 1,125
1,200 to 1,500
100 to 2400 (depends on closing date)
50 to 1200 (depends on closing date)
$6,800 to $16,975
$21,800 to $31,975
|*Even if you are not required to escrow money for taxes, you may want to set aside this amount to assure that you will be able to pay these tax bills when they fall due.|
NEW JERSEY REAL ESTATE
Lawrence (Larry) Yerkes
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H. Lawrence Yerkes
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