You’ve done your house hunting and you’ve finally found your dream home. Now it’s time to get serious about the purchase. You’ll hear term “closing costs” but what are they, why do they need to be paid, and how do they affect you? We’ve compiled a guide to help you understand financing part of the process so you can be better prepared when the time comes.
What are Closing Costs?
Closing costs are fees associated with your mortgage that are paid at the closing of the real estate transaction. The closing is when the title of the property is transferred from the seller to the buyer or in the case of refinancing, when the owners sign the closing documents.
Within three days of us receiving your completed loan application, we will provide you with an estimate of the closing costs on your intended home. This estimate provides a lot of information so be sure to review it carefully. It even gives you an estimated monthly loan payment amount. With this document in hand, you have a better idea of what you are going to pay and can budget accordingly.
Bank fees are a part of closing costs. There are a variety of bank fees and each institution has their own set of fees they charge. Some charge an application fee, origination fee, processing fee, or underwriting fee and these amounts can vary as well. As of May 1, 2017, Auburn Savings only charges borrowers a single one-time origination fee of $500.
Third Party Fees
Other fees associated with your closing costs would be third party fees; fees that are charged by others for services necessary to complete the loan process. These fees include the following:
- Credit Report Fee
- This is the fee charged by the company that provides us with information about your credit history. This information helps us determine your eligibility. (See our blog post on credit reports for more information.)
- Verification of Employment Fee
- This fee is charged when your employer requires us to utilize a service bureau to verify information about your employment. We find this is only typical with larger employers.
- Flood Determination Fee
- Is the property in a predetermined flood zone? This verification process includes an initial search of the government data base, then a certification and notification process. A property in a flood zone will require special flood insurance. This is important for both you and us to know.
- Appraisal Fee
- This fee is for a report from a certified appraiser to determine the property’s market value. Market value is the best indicator of what someone should pay for a property.
- Title Search & Settlement
- Title searches done by a title company or title attorney ensure the property you are purchasing (or already own) has a clean title. A clean title means there is no question that you will be the undisputed legal owner of the property. This is very important and will provide you peace of mind as a new home owner. These fees vary and are typically passed on to you.
- The Settlement Fee is charged by the title company/attorney to prepare all the documents and conduct the closing.
- Lender’s Title Insurance
- Lender’s Title Insurance is an insurance policy that protects us, the bank, if something was missed during the title search. We, as do most lenders, require this on all mortgages. Remember, this only covers the bank and not you the borrower. There is other insurance you can purchase to protect yourself. It’s called Owners Title Insurance and you can read more about that below under Optional Fees.
- Recording Fee
- Recording Fees are charged by the county in which your property is located. Whenever a new mortgage transaction takes place, whether it’s a purchase or a refinance, a mortgage deed is recorded at the county’s registry of deeds and is on file as a public record until the mortgage is paid in full.
- Mortgage Loan Inspection (MLI)
- Mortgage Loan Inspections (MLI) are typically required when someone is either building a new home or purchasing a home. A surveyor inspects the property based on information from the town tax maps, a current deed, a subdivision plan (if applicable), as well as any other knowledge of the property the surveyor may have. This inspection process determines if there are encroachments and landowners have adhered to the town restrictions. Typically at the time of closing, you are provided a sketch of the property and description of the work completed.
- Transfer Tax
- The State of Maine charges a Transfer Tax of $2.20 for each $500 of the purchase price of the property being transferred. Transfer Tax is split half to the buyer and half to the seller. For example, a home being sold for $150,000 would cost each the buyer and seller $330.00. Transfer Tax may also be applicable when refinancing if you are adding or removing someone from the title who is not a spouse or immediate family member.
- Prepaid Interest
- Monthly mortgage interest is paid in arrears, not in advance. For example: when you make your June 1st mortgage payment you are paying the interest for the month of May. So on the day you close on your mortgage loan and promise to pay back the money you are borrowing, you are paying the interest from that day to the end of the month. Your first full loan payment won’t be due until the first of the following month. And in our example here that means your first payment would be due July 1st.
Some closing costs associated with a mortgage are optional but here they are for you to think about. We’d be happy to discuss more about them with you.
- Owner’s Title Insurance
- This insurance is a one-time cost to you and protects you in case something was missed during the title search. Typically done when you first purchase your home and not something you’ll have to buy again if you refinance.
- Initial Escrow Deposit
- Although escrow (an account established to pay your taxes and/or insurance) is not a true closing cost, it is money collected at the time of closing to establish your new escrow account. The bank will calculate an amount that needs to be deposited, based on the tax and insurance due dates, to get the escrow account established and ensure that there are enough funds to pay these items when they are due. This is paid to the bank at closing.
- Private Mortgage Insurance (PMI) Premium
- PMI is often required by the Bank when borrowers don’t have a 20% down payment or sufficient equity in their home when refinancing. PMI can be paid monthly with the mortgage payment or as a one-time cost collected at closing. If choosing the monthly option one months’ premium is required at closing.
How Can I Avoid Paying Closing Costs?
Closing costs are not something you can avoid. But you can ask the seller to pay some or all of the cost as a way to reduce your out-of-pocket expenses. This is typical and most sellers’ expect to pay at least a portion of buyers’ closing costs. Closing costs and the amount a seller is willing to pay will vary so talk with your Real Estate Agent and have them negotiate the best deal for you.
When you are refinancing your home you may have the ability to roll your closing costs into your mortgage. This means you are financing the cost over the term of your loan. Ultimately you will be paying more but this can be a good option if available cash is limited. We’ll have to make sure there is enough value in your home to allow this but it can be a good way to reduce the amount of out-of-pocket expenses you have.
Customer Bonus: If you are an existing Auburn Savings customer with an active checking account you may be eligible to receive a $150 credit towards your closing costs with an Auburn Savings mortgage.
How do I Compare Closing Costs Between Lenders?
The best way to compare closing costs between lenders is by comparing the Annual Percentage Rate (APR). The APR is a standard calculation that combines the interest rate, origination fees, points, and other prepaid closing costs. The APR is designed to help consumers compare rates so you know what you are paying. The higher the APR is compared to the interest rate, the higher the closing costs will be. Also keep in mind this does not include all closing costs, only items that are considered to be prepaid. To get the most accurate estimate of what a lender’s closing costs would be is to contact a loan officer directly and ask what the estimated closing costs would be for the loan amount you are considering.
Why Closing Costs Matter
Closing costs matter because you can’t buy or refinance a house without them. You may be able to get the seller to pay for some or all of them, but regardless they do need to be paid. This is an expense many buyers don’t think when setting out to buy a home. These costs can range from $2,500-$6,000+ depending on your purchase price and loan amount, so you need to consider them in your overall cost when shopping for a home. We understand that at first you may think some of these costs are unnecessary, but remember buying a home is a big investment and these services are protecting your investment for you and your family.
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