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9 Items That Make Up Most Of The Closing Costs
Every time I draw up a list of closing costs items, someone would come along and mention additional items that need to be included.
There can never seem to be a fully comprehensive list of closing cost expenses.
Unless you run into a charitable seller who is willing to take on a significant portion of the closing costs, you are ultimately going to pay for them… one way or another.
Don’t think that third parties are telling the truth when they offer to do certain tasks for free. Because they must have worked that into the total price they are charging in the first place.
Here are some of the items that will take up a significant portion of closing costs.
1) Appraisal fee
The lender will need to have the property in question to be appraised by a qualified appraiser so as to provide an estimate of the value of the house.
They need to obtain this value to work out the mortgage amount according to the loan-to-value you are either eligible for or qualify for.
Surely you cannot expect a bank to lend you $500,000 just because that is the transaction price. If the value of the property is appraised as $400,000, the lender would make a loan offer accordingly.
2) Closing fee
This is is like a service fee or a administrative fee charged by the title company for the services rendered.
Again, you might come into a situation where you get it for free or have it heavily discounted.
This is often due to tie-ups and partnerships that the company has arranged with other third party service providers. And these businesses would in turn charge a high margin to pay the company offering free services.
For example, you might be offered a heavily discounted price if you use a law firm which they recommend.
3) Credit report
Lender pull up the credit record of borrowers whenever borrowers apply for any credit facilities.
They use this credit history record to run numbers that determine the credit-worthiness of the borrowers.
While there has been a lot resistance from consumers for this practice of credit recording for privacy reasons, this system of credit scoring in the lending industry is not going to change any time soon. If ever.
It cost money to churn out your credit report. And this fee is passed on to you.
4) Deed recording fee
While this is not a significant amount when we put the price of a house into perspective, it’s important to note that you will be charged a fee for the recording of property changing hands.
You should keep this in mind just so that you don’t get the wrong idea that you are being charged for something that is usually free.
5) Discount points
Discount points is basically the practice of charging the borrower a percentage of the amount borrowed.
And they are usually deducted directly from the loan before disbursement.
This is a common way of doing business especially with small consumer loans and SME loans.
This sometimes also take on the disguise of an admin or service fee.
Other times, a fancy marketing tactic to to offer low interest rates, but with discount points.
For short terms loans, discount points don’t add a lot of value to the overall picture in terms of finances.
There is a rising trend of property buyers taking up mortgage insurance even when it is not a requirement for the mortgage.
However, more and more lenders are packaging the loans with insurance to both protect themselves and increase revenue.
There are mortgages out there which offer better interest rates on the condition that borrowers sign up for mortgage insurance with their insurance partners.
In this case, you will have to pay the premium of the policy before the mortgage can be finalized.
In some cases, you might even need to buy private mortgage insurance.
7) Loan origination
Trust the bankers to squeeze every penny out of you.
As if signing up for a 25 year mortgage with discount points are not profitable enough for them, some lenders will charge a fee for the documentation for establishing the loans.
This is on top of any administrative, fees service fees, discount points.
Depending on the details of the transaction you are involved in, you might have to settle outstanding and current taxes for closing.
9) Title insurance
Some lenders require borrowers to buy title insurance while others don’t find it necessary.
However, more and more people are buying title insurance because they feel that they need it for peace of mind.
It is definitely gaining popularity as more and more property buyers get educated on the potential title problems that can arise especially with older houses.
Finally, remember that the seller is the prime candidate for subsidizing the closing costs.
If he/she is eager to sell, you can often come to an agreement for you to split the costs. But do mention it up front. It’s not a something that people like to be surprised with.
As mentioned at the beginning, the list of closing costs items never seem to end. Here are some more:
- Application charges
- Flood certificate
- Processing fees
- Tax services
- Property tax
- Title examination
- Title insurance
- Legal fees
- Abstract fee
- Stamping fees
- Conveyance fee
Even with such a long list, the 9 items mentioned will still make up the bulk of the expenses.