Understanding Closing Costs

Closing costs include all the additional fees that you will pay when you finalize your real estate transaction. (These are separate from your down payment and monthly mortgage, so be sure to budget for them.)

What are recurring closing costs?

Fees that are paid more than once, such as property taxes. Property insurance fees, private mortgage insurance (PMI)premiums, and prepaid interest are also recurring costs. Non-recurring closing costs are one-time fees associated with transferring real estate property. These include escrow fees, fees for title insurance, credit reports, notaries, loans and commissions.

What is a HUD-1 Statement?

A HUD-1 Statement is a standard form used to itemize closing costs that’s published by the Department of Housing and Urban Development (HUD). Both buyer and seller must sign this document when closing a real estate transaction.

When is the final walk-through scheduled?

The final walk-through is usually scheduled the day before the closing or just prior to closing. The final walk-through takes 30 minutes to an hour, depending on the size of the property.

It’s important for buyers to see the home vacant and walk through each room to ensure that the condition of the home is as expected. The closing can be postponed if the property is not in the condition agreed to in the sales agreement.

Who decides the closing date?

Buyers and sellers must agree on a closing date, taking into consideration several factors. Sellers may need to coordinate the timing of their move to a new home.

Buyers who are renters may need to vacate a property according to the terms in their rental agreement. Or, they may need to sell their home before closing on the new home.

Buyers who plan to take out a loan must also consider the time it takes to apply for and receive funds. Most federal loans close within 30-45 days.

What is a proration agreement?

The proration agreement is a closing document. It describes how some costs, such as property taxes, will be divided between the buyer and seller.

For example, if the seller has paid property taxes for the year, but the buyer will occupy the property for the last three months of the tax year, the buyer will “refund” three month’s worth of property taxes to the seller.

This refund, or prorated amount, will be detailed in the proration agreement. Other fees, such as homeowner’s association fees, may also be detailed in the proration agreement.

Why are my closing costs more than my good faith estimate?

According to federal law, lenders must provide loan applicants with a good faith estimate of closing costs within three days of applying for a loan. As of January 1, 2010, lenders and mortgage brokers must provide accurate good faith estimates as mandated by the Department of Housing and Development (HUD).
A number of estimates on the new form cannot vary when you get to settlement.

Adjustments to good faith estimates are common, especially for items like pre-paid interest, which accrues daily. Collections for escrow accounts and home owner’s association dues, as well as other fees may also increase total closing costs, as they are not bound by any HUD-mandated tolerance limits.


What is a Certificate of Occupancy?

When closing the sale of a new home, the developer must provide a Certificate of Occupancy. The document certifies that the home is in compliance with local health and building codes. Buyers may cancel the sales contract if the developer cannot provide this certification.

Do I have to have an escrow account?

Most lenders automatically set up escrow accounts, which are also called impound accounts. The lender collects monthly payments for property taxes and homeowner’s insurance in addition to your mortgage payment. The lender deposits these payments into the impound account and pays your taxes and insurance payments when they are due.

Impound accounts are helpful if you need assistance putting aside money to pay your tax bill and annual insurance premium. But, you have to rely on your lender to make your payments on time. And, you don’t earn interest on your money in the impound account.

If the down payment on your loan is at least 20%, you may be able to refuse the impound account. If you prefer to pay your property taxes and homeowner’s insurance on your own, let your lender know when you apply for the loan.

Don’t wait until closing. Also, be aware that your lender may charge a fee for waiving the escrow account. It doesn’t hurt to ask the lender to reduce or eliminate this fee.

What are my options for paying closing costs?

Sometimes, closing costs can be included in the amount of the mortgage loan. Or, the lender may agree to pay the closing costs in exchange for a higher interest rate on your mortgage. If a lender does not make these options available, the buyer must pay for closing costs out-of-pocket.


When do I report the sale of my home to the IRS?

You do not need to report the sale of your home to the IRS if both these conditions are met:

  • If the profit from your home sale is $250,000 or less for singles or $500,000 or less for married couples.
  • If you have lived in the home as your primary residence for 2 of the last 5 years before the sale date.

If both these conditions apply, your agent may ask you to sign a Certification for No Information Reporting on the Sale or Exchange of a Principal Residence at closing.

If both of these conditions do not apply, your real estate or escrow agent will file a Form 1099-S with the IRS and you will be taxed on the capital gains from the sale of the property.

I’m going to be out of town when my property closes. Can I fax signed closing documents?

You can ask. Some escrow companies may accept faxed signatures until hard copies can be signed. But, most escrow companies won’t consider closing escrow by fax.

A better alternative is to select someone to sign on your behalf. You’ll have to complete a Power of Attorney form and have the form filed at the County Recorder’s office.

It’s a good idea to limit the Power of Attorney to the single real estate transaction at hand. And, be sure to cancel the Power of Attorney as soon as you return.


How do I know if I’m getting a good rate?

Deciding to refinance is a personal decision that depends largely on your unique financial situation. Here is a popular rule of thumb:

  • If you have a 30-year loan, consider refinancing if the interest rate on the new loan is at least 1% less than your current loan.
  • If you have a 15-year loan, consider refinancing if the interest rate is at least 2% less than your current loan.

However, there is no one right answer. For example, if you don’t plan on being in your house long, refinancing may not be worth it — even if you find a lower rate. And, no matter what, it’s important to weigh the costs of refinancing as well as the savings.

To help decide if refinancing is right for you, use a refinancing calculator, such as the one available at Bankrate.com.

I’ve applied for a loan to refinance my house. Can I change my mind?

The Truth in Lending Act allows borrowers a three-day period to cancel a loan. The three-day period begins at midnight on the day the loan closes. Sundays and federal holidays are not counted in this period.

If you want to cancel a loan, you must do so in writing. The letter must be postmarked before your three-day period has expired. It’s a good idea to send the letter via registered mail. Lenders have 20 days to return any loan fees that they have collected from you.

What is cash-out refinancing?

Cash-out refinancing is a loan that pays your existing mortgage and your closing costs. It also provides you with a sum of cash that you can use for any purpose. You must have equity in your home to qualify for this refinancing option.

It’s a good idea to carefully consider whether this refinancing option is right for you. Why? Because you’ll be increasing your principal balance and paying interest on the cash over the life of the new loan.

I recently financed and my loan was sold. What does this mean?

Lenders often sell loans to mortgage service companies. These companies are usually other lenders or banks. Or, they may be third-party mortgage servicers. Because loan selling is common, you shouldn’t worry if your loan is sold.

The new loan servicer cannot change any of the terms of your loan. But, it is a good idea to look over your new statement as soon as it arrives. Make sure all of the information is correct. If you find errors, notify the new mortgage service soon as possible.

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