What are Closing Costs?

Closing Costs:  These are costs associated with buying a home. They can be categorized into two main elements, one is the Title and Escrow portion while the other is Loan related costs. Depending on your perspective there is also a third element in the costs associated with buying a home and that includes inspections. Some consider these closing costs and some don't, they are costs associated with buying a home so I've included them. The attempt here is to cover the expenses you could expect in the process of buying a home.

Below is a example of these costs:
Not all properties will be affected by all these, some will have more and some less, it is only an example.

Closing Costs:

Title Insurance (Buyers Policy)
Title Insurance (Lenders Policy)
Escrow Fee
Recording Fees
Notary Fees
Overnight Delivery
 


Points
    Loan Origination &
    Discount

Appraisal
Underwriting
Impound Accounts (if applicable)
    Property Tax
    Home Owners Insurance (fire & hazards)
 
Pest Control - (includes dry rot)
Home Inspection
Others - pool, spa, HVAC, etc.
 

Title & Escrow

Please keep in mind some of the duties and procedures described below are what is common for our area of Northern California. The person or company who handles some of these items will vary depending on the customs of the local marketplace. 

Title Insurance:  There are two Title Insurance policies normally involved with a purchase. The Buyers and Lenders Policies, each policy covers the respective parties with insurance in case of a claim against the property involving the ownership or easements of record that affect it. As with any insurance some items are not covered.

Escrow Fee:  The job of an Escrow Officer is to act a neutral third party to the involved parties which include the buyers, sellers, sellers lender and buyers lender. The escrow officer overall effort is to facilitate the transfer of ownership. The Escrow officer, also work with the Realtors (me) in order to obtaining answers to questions when necessary that involve title, escrow, financing, inspection reports, bills that become a part of the escrow and related issues. On the sellers behalf they compile the payoff demands from the existing lenders and make arrangements for the seller to sign all the necessary documents which included the deed to the home. On the buyers behalf they work in conjunction with the new lender to get all the new loan documents signed correctly when they are ready. The job of the escrow officer is generally fast paced and stressful with little time to get the documents signed and returned to the correct parties, a good escrow officer is a necessity.

Recording Fee: While not a large expense this is paid to the County to facilitate the recording of the Note and Deed of Trust (ownership of the home and the loan agreement).

Notary:  Some of the documents signed must be notarized. A notary (the Escrow Officer in many cases) is licensed and has had training in the proper procedures to record who signed the documents in their presence. This is a required step in the lending and recording process.

Overnight Delivery: Time is a key factor as the closing date is approaching. Documents signed by the buyer or seller may need to be sent through an overnight service to expedite the process and get you into the home on time.


Loan Costs

Loan fees vary dramatically depending on the type of loan you are asking for or are qualified for. There are often what I call "Garbage Fees" associated with the loan, they are often small in size yet add up. I include in this group things like Processing Fee, Underwriting fee, etc.
In many cases they are reasonable
and others they are a quiet way to pad the bottom line of the Loan Broker.

Points:  These are a bit confusing some times. A "point" in loan terms is equal to 1 percent of the loan amount. If you were dealing with a $200,000 loan amount, 1 point is equal to $2,000. There are often two items in the loan process where points are discussed.
    Loan Origination: This is often equal to 1 point and is a fee to originate and process the loan. This covers the costs associated with the people you -are working with in compiling the information and helping you.
    Discount Points: This cost is closely associated with the Interest Rate you pay. On one day you can have a specific interest rate that carries with it a -cost of zero discount points while the next day that same interest rate may cost 1 point, 1/2 of a point, or some other amount depending the q-National Lending market trends for that day. Discount points can be manipulated to your advantage: If for instance you're a bit tight on cash -when getting into the home you and your lender can adjust the discount points to zero and pay a slightly higher interest rate to offset the up front -cost. This saves you cash at closing in exchange for the slightly higher payment.

Appraisal:  The appraisal cost is usually an up front cost paid to the Appraiser. This appraisal is intended to show you and the bank that you are not paying to much for the property and the bank is not taking an unreasonable risk in lending the money to you. In tough market conditions there can be an Appraisal Review that is done. the purpose is to have a second set of eyes on the appraisal to assure the new loan is a safe investment for the bank..

Underwriting / Processing Fee:  On some loans these fees will be charged, keep an eye on them and ask questions. These and other similar costs are important to help determine who you will want to use when you're doing your shopping for a lender. To wait till the end of the escrow period when you're singing your loan documents, I'm sorry to say but it's to late. You need to do your research before you get to this point and have a clear understanding of what charges the lender is charging as a part of the loan.

Impound Accounts:  These accounts are often set up as part of the loan to assist you in getting your Homeowners Insurance and Property Taxes paid in a convenient fashion. The lender essentially opens an account in your name within the new loan where they can pay the insurance and taxes for you. Sounds to good to be true, I know. The punch line is your payment is adjusted upwards by the combined amount cut into 12 equal parts in order to accumulate the funds to pay when the bills when they come due. It actually makes it much easier for most buyers budgeting and assures you won't get a large annual or semi annual bill.


Inspections

Pest Control:  Structural Pest Control inspections are a very good idea to have and are often required. There are two sections within this inspection active infestation and dry rot (section1) and items that may lead to problems (section 2). Many loans will require a Section 1 Clearance and most people will want this even if the loan doesn't require it. Section 2 items are generally considered maintenance related and the new homeowner assumes them in most cases.

Home Inspection:  A home inspection is a very good idea to have to help assure you of what you're buying. A trained professional will look over the home and inform you of area in need of attention. In some cases the home inspection can change the minds of buyers due to the results, in most cases a couple repairs for health or safety related items takes care of what comes to light.

Pool, Spa, HVAC, etc:  Inspections such as these are dependant on the property and information known about the components.

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