buying and closing: the closing process
What’s Included in Closing Costs
Closing costs are in addition to the down payment and include all the fees and expenses associated with acquiring financing, transferring the title, and legal aspects of completing a home purchase. Here are the most common closing costs:
Closing Costs = ~1.5-2% of Mortgage Amount
Mortgage Application Fees: To process the loan application, paid to the lender
Inspection Fee: To perform the home inspection prior to closing (assuming this contingency has not been waived) and paid to the inspector.
Appraisal Fee: To perform the appraisal prior to closing and paid to the appraiser.
Survey, Title, and Recording: To search, confirm, and record the existing and new title transfer.
Broker Commission: Paid for by the seller (deducted from cash proceeds) and paid to the agents on both sides of the transaction.
Home Warranty: Paid at closing by the buyer as a closing cost fee.
Property Insurance: Paid at closing by the buyer and is sent to the insurance company. Proof of homeowners insurance is generally required at closing, so the insurance company is known.
Property Taxes: The prorated portion owed by the buyer if taxes are paid in arrears. This is confirmed by the attorney and paid at closing.
Points: One point is equivalent to 1% of the mortgage balance, and can be paid in order to obtain a more favorable interest rate. These are paid at closing.
In total, closing costs typically come out to approximately 2% of the mortgage amount as a proxy. Many lenders will be able to apply closing credits as incentives, so be sure to ask and solicit offers from multiple lenders.
When obtaining pre-approval, lenders will include these estimated costs with any estimated payments for different interest rates, down payment amounts, and mortgage amounts. While some of these fees are known (Survey, Title, and Recording, for example) some are based on the home (taxes) and are estimates. Nonetheless, all buyers should consider closing costs when planning their affordability.
How To Prepare for Closing
Have All Your Docs Ready
Your attorney, lender, and agent will know the required documents to bring on closing day. These include an official ID, down payment amount (generally submitted via wire transfer prior to closing, and the transfer is confirmed during closing). The exact dollar amount of closing costs will also be communicated to you prior to closing so you know exactly the amount necessary, although it is also a good idea to bring your checkbook in the event there are last minute changes.
Aim for Mid-Month
Why does timing matter? Because at the start of each month, closing costs and prepaid interest may rise, so if you wait until the last day to close, you risk having to go out-of-pocket to cover incremental increases in costs.
Use a Good Attorney
Be sure to use a good attorney. Your agent should be able to recommend someone with both experience and one that they have worked with in the past. This helps in communication. Your attorney is responsible for reviewing all the contracts and ensuring any documents associated with the condo home owners association (HOA), insurance, and more are confirmed and in good standing.