Surprises are for birthdays... not real estate closings!!
If you have never bought or sold a house before you may find...
.... as a home buyer you have to pay mortgage closing costs on top of the down payment you already scraped together....
....or you are selling your home and you find that you have closing cost after your real estate commission eating into your net proceeds.
Either way closing costs can be a tough pill to swallow. Calculating closing costs upfront will allow you to budget and be prepared so there are no last-minute surprises, leaving you scrambling around to find more money.
We will be discussing closing costs in Massachusetts. Realize closing costs can vary slightly from state to state. Consult with your mortgage officer and agent early and ask specifically what your closing costs will be when you close on a home.
Closing Costs Explained
What are closing costs? Both homebuyers and sellers will incur closing costs during the purchase or sale of a home.
Simply, closing costs are fees for services and expenses that are incurred during the purchase or sale of your home. Nothing is free!
Who Pays Closing Costs?
Both buyer and seller have a distinct set of closing costs for the services and expenses of closing on the home. Typically, in Massachusetts, it is customary for each party to pay their own respective fees.
In some states like New Hampshire, some line-item fees will be split among buyer and seller like tax stamps.
On occasion, a homebuyer may include in their offer to purchase that the sellers pay all or a certain amount of money towards closing costs. This is a way for a buyer to roll closing costs into their mortgage. But before you can automatically think you can do this, talk to your REALTOR, there are pros and cons of asking a seller to pay their closing costs.
How Much Are Closing Costs?
Closing costs for home buyers are a little more complicated than for home sellers. And, can widely vary depending on the loan program that they choose. But closing costs for buyers can run between 2-4% of the home purchase and are on top of any downpayment money.
So for a $400,000 purchase closing costs would typically run from $8000 to $16,0000.
For home sellers closing costs can run between 4% to 9% of the purchase price. On a $400,000 purchase that would have a seller paying anywhere from $2,000 to $6,000 in closing costs on top of their real estate commission.
What Are The Closing Costs For Home Buyers?
The list of closing costs for home buyers is many and can vary slightly. Here I will cover the standard ones that you may see.
A fee charged by the lender up front and covers all or some of what they get paid to provide the loan.
Covers the cost of an appraisal of the home you are about to purchase to verify fair market value to a lender.
The Closing Protection Letter is an indemnification between the Titel Insurance company and the Lender.
Charges for any credit reports pulled during the mortgage process
Courier fees cover the cost of sending out your completed loan documents to various parties.
Wire Transfer Fees
Wire transfer fees cover the costs of a lender wiring money to a settlement agent.
The flood cert is obtained by the lender to see if flood insurance is necessary on the property.
The MERS Fee is to register your loan with the Mortgage Electronic Registration Service that tracks loans through a database.
Processing fees cover the cost of processing your documentation during the lending process.
The underwriting fee covers the cost of underwriting evaluating your loan application to see if it fits the guidelines for a particular loan program.
Tax Service Fee
Your tax service fee goes to an agency that tracks your property tax for the mortgage lender.
Prorated adjustments are prepaid by the seller for property tax, condo fees and etc... You are reimbursing the seller from taking possession forward.
Settlement fees are paid to the settlement agent for handling the closing.
Owner's Title Insurance
A title insurance policy that covers title defects on the home you are purchasing for the homeowner.
Lender's Title Insurance
The policy covers the lender in the event there is a title defect.
Pre-paids are monies paid in advance. You will pay one year of home insurance in advance as well as daily interest from the day you close to the end of the month. Unlike everything else, mortgage payments are paying for the prior month. Your pre-paid interest is funding the month you close.
Escrow monies are held in an account. You are pre-funding several months of city taxes and insurance for the next payment. The bank always wants you a few months ahead.
Closing Costs For Home Sellers
Real Estate Commission
The agreed-to percentage you agreed to pay your real estate agent to sell your home.
Recording fees are charged for the cost of recording the various documents at the registry of deeds. It can include the deed, mortgage, 6d certificates, etc...
A municipal lien certificate states that as of the date of the closing you owe no money to the town.
Tax stamps are a real estate transfer tax of .456% in Massachusetts. There are also several cities that levy a tax stamp in Massachusetts as well.
A discharge fee is paid to your settlement agent to track the discharge of your mortgage.
Courier fees are to ensure your balance on your mortgage gets to your mortgage company.
Whether you are a home seller or home buyer you want to make sure you have an understanding of closing costs early on in the process so you don't get surprised just prior to closing. Avoid any last-minute surprises just prior to closing by knowing what your closing costs will be.
Your real estate agent or mortgage broker should be providing you with estimated closing costs prior to either listing your house or with-in a few days of submitting a loan application