Monday, May 23, 2011

The confusion about closing costs

   Can anyone know what their closing costs are going to be?  Seems like a simple question with what should be a simple answer.  Take it from me, its not simple.  There are several areas that I want to cover here in an attempt to clarify:

  At the end of the day, I believe that borrowers want to know the following question-how much money do I need to bring to the closing table?  If that's the question you want answered then you have to understand what is a real closing cost and what is a pre paid item. Below is a list of both but does not encompass all of them:

REAL CLOSING COSTS                                          PRE PAID ITEMS
Title insurance                                                               Per Diem interest (1st mortgage payment)
Credit report                                                                 Tax escrows
Ancillary title fees
Bank attorney
Underwriting fee                                                                                                                 Appraisal                                                                 
Mansion tax
Mortgage tax

  Ok, now you know which items fit into which category.  Should be easy now, right?  Wrong. Typically, the real closing costs are fairly easy to figure out.  The most difficult part on that side is the title bill.  For all purchase transactions, the borrower's attorney orders the title insurance and tends to use the title company that they know and have done buisness with.  The title premium is state mandated so no matter which title company is used, that number is set.  Once you get into the area of searches, endorsements, title closer, etc, it can vary from one company to another.  The pre paid items is where it gets complicated as these are not fixed costs.

Per Diem Interest-  Again, this is your 1st mortgage payment.  The bank doesn't want to wait to bill you for that, thus if you close on March 15th, the bank will collect the mortgage payment that starts on March 15th and runs through March 31.  You will not receive your April bill until May 1.  So, the day of the month you close changes that payment number and if you have a large mortgage, it can be thousands of dollars.

Tax Escrows-  If you choose to pay your taxes with your mortgage payment, the bank is going to collect anywhere from 2-6 months of taxes at the closing table.  The method by which it is determined how much they will take depends on a few factors-when the last tax bill was paid, when the next tax bill is due, etc.  Many times, you don't know what month you are closing so its very hard to determine upfront what that is going to be.  Always assume the worst.  Also, realize that if there are any taxes due within 60 days of closing, those will be collected at the closing table

  As you can see, a lot goes into this but there are a few rules of thumb that are important to follow:

  • Always speak to a mortgage professional before entering a contract so you have a good idea of approximately what your closing costs are.
  • When estimating pre paid items, always assume the highest numbers as you do NOT want to be caught short.
  • Speak to your attorney and ask them what the title bill should be.
  • Have your real estate broker, mortgage professional and attorney be on the same page about these costs.

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