Many home purchasers, particularly first-time buyers, find that a little research and preparation can help you avoid unexpected surprises when it comes to costs and fees associated with purchasing. Knowing which items will be included in your closing costs can help you calculate your upcoming out-of-pocket expenses.
Items that are charged in connection with the loan financing or approval are payable at closing. The most expensive item in this category is the loan origination fee, which is generally 1 percent of the loan amount. Calculate this by multiplying the purchase price by the loan origination percentage fee amount. For example, a 1 percent origination fee for a $200,000 home would be $2,000. Other loan-related expenses include fees charged in connection with obtaining a flood certificate, credit reports, appraisals and underwriting. These are fixed rate services that vary by vendor, so contact your agent for accurate rates.
Prepaid Insurance and Association Fees
Homeowners are required to pay the initial interest, insurance and, if applicable, homeowner’s association fees at closing. Hazard and mortgage insurance along with association dues are prepaid for the first year of coverage; the number of days of interest that are payable at this time will depend on the date of your closing, but it could be anywhere from one to 30 days. For example, if you close on April 10, you will be required to pay 20 days of interest on the day of your closing to cover any expenses that will have been accrued by the first day of the following month.
The interest can be calculated once you have confirmed your interest rate and compound frequency. To get a ballpark figure of the daily interest you will pay, multiply your loan amount by the interest rate and divide by 12 for an estimated monthly interest amount. Divide this figure by 30 to arrive at your estimated daily interest amount and multiply by the total number of days left in the month. This method may be slightly off depending on your loan’s compound frequency.
Lenders are allowed to retain a two-month cushion in your escrow account to cover recurring expenses such as mortgage insurance and property taxes. This cushion ensures that there are enough funds in your account to cover these expenses in the event that fluctuations in your home’s value cause your payments to increase. Because of this regulation, your lender will likely require the equivalent of two months' worth of tax and insurance payments to be collected at closing and deposited into your escrow account.
Your insurance agent can provide a premium estimate based on your home’s value, location and selected coverage options. Your property tax amount can be estimated by visiting your city treasurer’s website to obtain your home’s most recent assessed value and multiplying that by your city’s property tax rate. Add the insurance and tax figures together and divide by 12 to estimate your monthly escrow payments.
Administrative and Processing Fees
Other items that are including in the closing costs are payment for administrative and processing services that were incurred during the processing or transporting of your loan documents. Common fees are charged for courier services, notary or other document endorsements, title policy, closing fee and the recording fee charged by your local court for registering the home sale transaction. These fees vary by service provider, but your agent can give you an estimate.
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