When prospective home buyers set out to choose a home, it is very important that they understand all of the costs associated with a the process.
By the time the home closes escrow, the total loan on the home is going to be the purchase price minus the down payment plus closing costs.
What Are Closing Costs
Closings costs are the additional amounts charged by the lender and third parties related to the processing of both the escrow and loan for the purchase of the home.
Some of these charges are fixed costs, while others are variable costs, depending on current percentages available in the marketplace.
With this kind of knowledge, buyers will know how to estimate closing costs when negotiating the purchase price.
Here is a listing of common closing costs:
- Loan Origination Fee – percentage of the loan amount charged by the lender for processing the transaction
- Credit Fee – This is a fixed cost fee charged by the lender for running credit reports
- Points – Buyers can “buy Down” current interest rates by paying a certain percentage (points) to the lender up front
- PMI – This fee buys insurance that protects the lender against default by the buyer. Buyers are required to buy PMI (private mortgage insurance) if the down payment is less that 20% of the final purchase price
- Prorated Interest – If the loan closes mid-month, the lender is going to collect interest on the loan for the remainder of the month
- Annual Homeowners Insurance - Insurance that protects the lender against property loss due to fire or natural disaster
- Title Fee and Insurance – The fee is charged by the title company for a title search and for providing insurance that protects the lender against unknown encumbrances
- Appraisal Fee – Charged by the lender to have the property independently appraised to make sure the loan doesn’t exceed the property’s true value
- Pro-rated Property Taxes – Property taxes are impounded by the lender on a monthly basis as part of the monthly payment. This pro-ration is for the partial month in which the home is going to close.
Understanding How to Calculate Closing Costs
When using a closing costs calculator, it is important for people to realize that reported results are only as reliable as the data used to make the calculations.
If a closing cost calculator is not available, the following manual methods of calculating each fee should give a good approximation of anticipated closing costs.
The most important piece of data needed is the purchase price.
For this exercise, assume a purchase price of $200,000 and a 10% down payment with all fees taken at the low end of the normal range for that fee.
Loan Origination Fee – usual rate is 1% ($200,000 x 1% = $2,000)
Credit Fee – Usual range is $50-$200 ($50)
Points – Usual range is 1%-3% ($200,000 x 1% = $2,000)
PMI – Rate is set by Ins. Co. ($1,000)
Pro-rated Interest – current rates 2.75% ($180,000 (PP – down) + $6,000 (Est Closing Costs) x 2.75% / 360 x 15 (days) = $213)
Annual Homeowners Insurance - $450 + $200 for every $100K value ($850)
Title Insurance Fees – $250-$5,000 depending on loan amt. ($250)
Appraisal Fee – Usual Range is $150-$400 ($150)
Pro-rated Property Taxes – Usual range is 1%-2.5% of appraised value, not purchase price. assume both are the same ($200,000 x 1% / 360 x 15 (days) = $83)
Based on this information, the closing costs would be approximately $6,600. The total loan would be $186,600.
As a general rule, closing costs should be 2%-5% of the purchase price.
When buying a home, it is always a good idea to try and negotiate with the seller and request they pick up some of these closing costs. It is actually a common process that helps keep the loan amount down.