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Prior to closing day, your lender should give you a list of itemized closing costs associated with your loan. The list should be exhaustive, but sometimes it is not. Some of the most common items missing include: attorney fees (if any), tax adjustments, oil adjustments, title insurance gratuity, and other closing adjustments.
If you find any of these items missing from the closing cost estimate provided by your lender, ask your lender about them. Request a detailed list of ALL possible adjustments and fees you might incur.
Closing costs are paid by the buyer, or the seller, depending on the cost. For example, the seller will pay a sales tax or conveyance tax in most states. In some cases, the seller even pays the closing costs of the buyers. When the seller pays these closing costs, it is referred to as a seller's concession.
The Seller's Concession
A seller's concession helps the buyers finance their closing costs. Basically, the closing costs are estimated in advance, and that amount is added to the sales price of the house. The seller then pays the closing costs of the buyer with these extra funds.
An Example
Let's say the purchase price of a home is $150,000, the mortgage amount is $135,000, and the estimated closing costs are $6,000. In that case, the seller's concession would adjust the figures in the contract to a sales price of $156,000 and a mortgage of $141,000. The extra $6,000 the seller earns would actually be used to pay the buyer's closing costs. Of course, this would need to be spelled out in the contract.
Financing Closing Costs
Some lenders let buyers finance closing costs without using the seller's concession. If you want to minimize your out-of-pocket expenses, speak to your lender about your options for financing your closing costs. Just keep in mind that you will be paying interest on this higher loan amount.
The key is to be informed and prepared. That means maintaining a list of anticipated closing costs and comparing it against the estimated costs prepared by your lender. Feel free to ask questions, and make sure you have the most accurate information possible so you can be prepared for the closing.
Most lenders give accurate estimates for closing costs. But there are some lenders who do a less accurate job, and there's always the possibility for human error. Rather than accept the closing cost estimate at face value, dig deeper until you are confident the estimate you received encompasses all closing costs.
Tax Adjustments
The most significant expense commonly left off the list are tax adjustments. Tax adjustments can be hundreds or thousands of dollars. Make sure tax adjustments are factored into your closing costs estimate. Otherwise, you may be unprepared for the amount of funds do on closing day.
* Copyright 2006, Brandon Cornett. You may republish this article if you keep the byline and author's note, and also leave the hyperlinks active.
Closing Costs Affecting Home Mortgage Rates
First time home buyers or borrowers are often rather unpleasantly surprised at the time of closing or just prior when the good faith estimate of closing costs is received. These closing costs can sometime add a significant cost to the dollar amount that the borrower is expected to provide to clear the escrow account at the time of closing or shortly thereafter. The home loan rate is not directly tied to each of the closing costs, but indirectly, you will pay the closing costs. You should make sure you realize and understand each of these costs and how they impact your total cost of the loan.
Definitions
'Closing costs' is just one of the definitions that you should understand when considering obtaining a home loan. The 'home loan rate' is another. Closing costs are expenses related to the obtaining of the loan, such as document preparation, title search, appraisals, and various other expenses. These costs are typically listed as part of the closing process on the loan. The closing of the mortgage at the title company or with the loan officer will spell out each of these costs and who is responsible for payment of the cost at closing.
Title search
One of the responsibilities that must be met is a search by a title company of court records to insure that the ownership or title to the home in question is clear. They will be looking at sales and deed records to determine that the sellers actually have the legal authority to sell the property. There is a fee charged by the title company to conduct this search. The clear title means that the title company can guarantee the title is correct and that you will have a clear title to the property in question after closing. The title company actually provides a type of insurance, known as title insurance. The cost of the title insurance is one of the closing costs built into the home mortgage rates.
Origination fees
Another factor in the home loan rate is that of origination fees. These are costs associated with the work the lender or broker does in opening an application file and working to collect and pass on all the necessary documentation required to complete the loan according to the contract. These fees can be sizable or modest, depending upon the broker, but in most cases are negotiable also that fact is not commonly known.
The borrower may be required to pay 'points' as part of the loan fees. There are two types of points that you may be asked to cover. Origination points are the fees you pay your broker or lender to secure the loan while discount points are essentially interest that you prepay in order to manage the best interest rates on your loan. Both types of points are usually paid at the home of closing. Payment of the discount points can significantly lower your home mortgage rates meaning thousands of dollars less in cost over the life of the loan.