Closing costs include the myriad fees for the services and expenses required to finalize a mortgage. You’ll have to pay closing costs whether you buy a home or refinance. Most of the closing costs fall on the buyer, but the seller typically has to pay a few, too, such as the real estate agent’s commission.
Average closing costs for the buyer run between about 2% and 5% of the loan amount. That means, on a $300,000 home purchase, you would pay from $6,000 to $15,000 in closing costs. The most cost-effective way to cover your closing costs is to pay them out-of-pocket as a one-time expense. You may be able to finance them by folding them into the loan, if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage. When buying a home, you can comparison shop and negotiate some of the fees to lower your closing costs. And some states, counties and cities offer low-interest loan programs or grants to help first-time home buyers with closing costs. Check with your local government to see what’s available. Your lender is required to outline your closing costs in the Loan Estimate you receive when you first apply for the loan and in the Closing Disclosure document you receive in the days before the settlement. Review them closely and ask questions about anything you don’t understand.
Appraisal fee: It’s important to a lender to know if the property is worth as much as the amount you want to borrow. This is for two reasons: The lender needs to verify the amount you need for a loan is justified and make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $300 and $400.
Home inspection: Most lenders require a home inspection, especially if you’re getting a government-backed mortgage, such as an FHA loan insured by the Federal Housing Administration. Before lending you hundreds of thousands of dollars, a bank needs to make sure the home is structurally sound and in good enough shape to live in. If the inspection turns up troubling results, you may be able to negotiate a lower sale price. But depending on how severe the problems are, you have the option to back out of your contract if you and the seller can’t come to an agreement on how to fix the issues. Home inspection fees, on average, range from $300 to $500.
Application fee: This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
Assumption fee: If the seller has an assumable mortgage and you take over the remaining balance of the loan, you may be charged a variable fee based on the balance.
Attorney’s fees: Some states require an attorney to be present at the closing of a real estate purchase. The fee will vary depending on the number of hours the attorney works for you.
Prepaid interest: Most lenders require buyers to pay the interest that accrues on the mortgage between the date of settlement and the first monthly payment due date, so be prepared to pay that amount at closing; it will depend on your loan size.
Loan origination fee: This is a big one. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees. Expect to pay about 0.5% of the amount you’re borrowing. A $300,000 loan, for example, would result in a loan origination fee of $1,500.
Discount points: By paying discount points, you reduce the interest rate you pay over the life of your loan, which results in more competitive mortgage rates. The cost of one point equals 1% of the loan amount. So if the loan were $250,000, a 1-point payment would be $2,500. Generally, paying points is worthwhile only if you plan to stay in the home for a long time. Otherwise, the upfront cost isn’t worth it.
Mortgage broker fee: If you work with a mortgage broker to find a loan, the broker will usually charge a commission as a percentage of the loan amount. The commission averages from 0.5% to 2.75% of the home’s purchase price.
Mortgage insurance application fee: If you make a down payment of less than 20%, you may have to get private mortgage insurance. (PMI insures the lender in case you default; it doesn’t insure the home.) The application fee varies by lender.
Upfront mortgage insurance: Some lenders require borrowers to pay the first year’s mortgage insurance premium upfront, while others ask for a lump-sum payment that covers the life of the loan. Expect to pay from 0.55% to 2.25% of the purchase price for mortgage insurance, according to Genworth, Ginnie Mae and the Urban Institute. FHA, VA and USDA fees: If your loan is insured by the Federal Housing Administration, you’ll have to pay FHA mortgage insurance premiums; if it’s guaranteed by the Department of Veterans Affairs or the U.S. Department of Agriculture, you’ll pay guarantee fees. In addition to monthly premiums, the FHA requires an upfront premium payment of 1.75% of the loan amount. The USDA loan upfront guarantee fee is 1%. VA loan guarantee fees range from 1.25% to 3.3% of the loan amount, depending on the size of your down payment. Property taxes, annual fees and insurance.
Property taxes: Buyers typically pay two months’ worth of city and county property taxes at closing.
Annual assessments: If your condo or homeowners association requires an annual fee, you might have to pay it upfront in one lump sum.
Homeowners insurance premium: Usually, your lender requires that you purchase homeowner’s insurance before settlement, which covers the property in case of vandalism, damage and so on. Some condo associations include insurance in the monthly condo fee. The amount varies depending on where you live and your home’s value.
Title search fee: A title search is conducted to ensure that the person selling the house actually owns it and that there are no outstanding claims or liens against the property. This can be fairly labor-intensive, especially if the real estate records aren’t computerized. Title search fees are about $200, but can vary among title companies by region. The search fee may be included in the cost of title insurance.
Lender’s title insurance: Most lenders require what’s called a loan policy; it protects them in case there’s an error in the title search and someone makes a claim of ownership on the property after it’s sold. Coverage lasts until the loan is paid off.
Owner’s title insurance: You should also consider purchasing title insurance to protect yourself in case title problems or claims are made on your home after closing. The owner’s coverage lasts as long as you or your heirs own the property. The cost of the owner’s policy is about 0.5% to 1% of the purchase price, according to the American Land Title Association. Whether the buyer or seller pays for title insurance varies by region. A discount is sometimes offered when both the lender’s and owner’s policies are purchased at the same time.
With so many closing costs to consider, it’s obvious you’ll face a lot of paperwork just prior to and during the loan signing. Two of the most important closing documents are the Loan Estimate and the Closing Disclosure. You’ll receive the Loan Estimate three days after applying with a lender. It will officially detail all fees, the interest rate and the other costs to close your loan. It’s legally binding, so you’ll want to read it carefully. Then, three days from loan settlement and prior to making the big commitment, you’ll receive the Closing Disclosure from your lender. It confirms — or makes minor adjustments to — what you saw on the Loan Estimate. Again, it’s worth a big cup of coffee and a thorough review.
Homebuyers, especially first-time homebuyers, may not fully understand the issue of escrow and how it relates directly to a home purchase.
But understand it they should, as escrow plays a vital - and protective - role in the home-buying process and thus needs to be thoroughly understood by homebuyer and seller alike.
Escrow is defined as an impartial third party in a major financial transaction between two parties that holds a valuable asset (usually cash) until the transaction is complete. When something is referred to as being "in escrow," they mean the asset is currently being held by that third party. While escrow is typically linked to real estate, it can extend to other major financial transactions.
Escrow is often used so that a neutral party can be involved in a transaction, giving the buyer more comfort in the deal (and the seller as well) knowing an independent mediator can mitigate the possibility of anyone trying to rip off the other party. An escrow service can also be the unbiased mediator that can help resolve the complications that inevitably arise in a large-scale transaction.
Mainly, there are three things that the term escrow may be referring to - real estate escrow, online escrow and escrow accounts:
Mortgage lenders typically insist on a real estate escrow account for the buyer prior to the purchase, before any home inspection or disclosures on the home's condition are completed. Often, escrow is required for any home purchase to occur. With real estate, both property and money will be considered "in escrow" before the deal goes through.
Once the buyer and the lender knows the property is in satisfactory condition, the money from the escrow account is released on the home purchase closing date.
Both in real estate and other areas, escrow accounts are what is used prior to a sale officially going through. Once the buyer has put their funds into an account, it is then incumbent on the seller to hold up their end of the bargain. Once the transaction has occurred, the money owed to the seller is released from the escrow account. Specific to real estate, the funds would not be the entirety of the cost of the home, but those funds still go to the seller upon completion of the purchase.
An escrow account can also be used after the buyer moves into the home, as the mortgage lender pays money owed on property taxes and homeowners insurance out of the escrow account, funded by the buyer. Minimum balances are often required in an escrow account. For mortgage lenders and homeowners alike, an escrow account can work as a safety measure to help ensure payments get made on time with money saved away for these payments.
Consumers doing business online use online escrow to provide a measure of protection on a digital purchase of a product or service. No matter how much the internet grows and develops, online sales continue to be an incredibly risky endeavor for many. Not every online transaction is as big as that of a home purchase, but you still want a safeguard to get your money back if something goes awry with an attempted purchase.
The escrow model works the same way, as the money is kept in an escrow account by a trusted third party, until the conditions of the purchase agreement are satisfied by both the buyer and seller, and the escrow money is released.
During the home sales process, the buyer puts up a predetermined amount of cash in an escrow account after an offer is accepted by the homeowner, and is held by a bank or other financial institution in an escrow account until the sale is finalized. This is what real estate and mortgage professionals refer to as "being in escrow."
Expect the home sale escrow process to last about 30 days - or the time it takes to fully sign off on the home sale between both parties and the mortgage lender. The homeowner doesn't get access to the money during escrow and the amount of cash put into escrow by the homebuyer is applied to the overall home sales price once the deal is finalized.
After the home is purchased, the buyer also uses an escrow account to pay property taxes and home insurance charges incurred as a homeowner. The mortgage loan servicer makes these payments for you, and has direct access to the escrow account. Mortgage lenders prefer escrow accounts especially for property tax payments, as they don't want the property, backed by their mortgage loan, to fall behind in taxes and risk a tax lien on the property. The same thinking applies to homeowner's insurance, where the lender can't afford the homeowner to miss payments, and thus risk losing insurance coverage on the property.
For homeowners dealing with an escrow account, a good rule of thumb is to expect to pay two months' worth of expenses on an escrow account at the home sale closing. Typically, once per year your mortgage lender will review your escrow account to make sure you have sufficient funds in your escrow account to cover property tax and home insurance payments.
While home sale escrow accounts aren't all that complicated, it's advisable for both parties to agree to a professional title agent, real estate lawyer or a mortgage loan servicer to handle the escrow process. Your real estate agent can direct you to a qualified escrow professional. In a home sale, generally the realtor will handle the creation of the escrow account to keep everything running smoothly.
In the event that you are handling the transaction yourself, you'll have to do some digging. You can search online for an escrow agent or service, or it may be easier to contact your local bank and ask for information on whether you're allowed to create an escrow account with them.
There's no federal law guaranteeing financial institutions to pay interest on the money held in an escrow account. However, a growing number of states - including Alaska, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont and Wisconsin - do require banks and financial institutions holding escrow payments to pay interest to account holders.
You can avoid an escrow account after a home sale (having an escrow account active while the home sale is completed is mandatory, however), but only under certain conditions. For example, if you put 20% cash down on your home, the mortgage lender may waive an escrow account, but could charge a significant fee for doing so. In general, mortgage lenders want to be sure those property tax payments and homeowner's insurance payments are on hand, in good order, and readily accessible for payments. Lenders can make it difficult to avoid an escrow account after a home purchase.
Escrow accounts aren't fixed. The amount of money held in an escrow account may vary, most notably due to fluctuations in local property tax assessments, which can and do move up and down during the time the homeowner is repaying his or her home mortgage loan. Additionally, if you pay off your homeowner's insurance early or if your home declines in value, your escrow payments can decline, as well.
There are fees linked to escrow accounts. Typically, an escrow agent will charge a fee of about 1% of the home sales price for handling the escrow account, paid at the home sale closing. The homebuyer and seller can negotiate who winds up paying the fee, or whether the buyer and seller will wind up splitting the fee.
After a home sale, it's up to the new homeowner to make sure his or her escrow account has enough cash to cover property tax and homeowner's insurance payments. The homeowner should expect the mortgage lender to be directly involved to make sure escrow payments are being made - and on time.
- The Street
When you're deciding on what price to offer on a home, the situation may call for a single price or, in some cases, an escalation clause. An escalation clause is a real estate contract, sometimes called an escalator, that lets a home buyer say "I will pay x price for this home, but if the seller receives another offer that's higher than mine, I'm willing to increase my offer to y price." In theory, an escalation clause is fairly simple. In practice, there are a lot of details involved.
While escalation clauses vary significantly, the general escalation addendum has a few basic components: What is the original offer of purchase price? How much will that price be escalated above any other competitive bid? What is the maximum amount that the purchase price can reach in case of multiple offers?
For example, buyer Adam offers $100,000 for a home. His Realtor adds an escalation clause that, in the case of a higher competing offer, will increase Adam's offer in increments of $2,000 above the competing offer. His escalation clause goes up to a maximum of $110,000. If no other offers are submitted, Adam's offer remains at $100,000. If buyer Green offers the seller $103,000, then Adam's offer would automatically escalate to $2,000 above that, bringing Adam's offer to $105,000. If buyer Orange offers $111,000 for the home, then Adam's maximum of $110,000 will be eclipsed, and Orange will have the top offer.
Some home sellers simply state that they will not accept an offer with an escalation clause. They would prefer that every buyer submits exactly what they're willing to pay. Sellers sometimes prefer this method because it motivates buyers to outbid one another on the first try. It also streamlines the paperwork and the decision-making process.
Escalation clauses should only be used when the buyer is fairly confident that there will be multiple offers, or when the buyer expects to pay an escalated price. If a buyer submits an offer with an escalation clause, they're laying all their cards on the table: The seller knows immediately how far the buyer will go to secure the home. If that offer ends up being the only offer submitted, it technically remains at its original price. A Realtor representing the seller will know, however, to counteroffer to the buyer at a higher, escalated price, since the buyer is clearly willing to pay more. While there's no guarantee that the buyer will agree to the higher price, it is likely that they will. A buyer gives up a lot of negotiating power and potentially leaves money on the table when using an escalation clause that goes unmet by a competitor.
In hot markets, there's a wide variety of offer-review processes. Some state that the property is going on the market on Friday, and all offers will be reviewed the following Thursday. The seller and their Realtor will make a final decision that day. This situation can be ideal for the escalation clause, when a buyer knows it's an all-or-nothing offer. Other sellers take a back-and-forth approach. They may collect offers from buyers for one week, and then respond to a handful of the best offers by saying "Send us your highest and best offer." This technique is particularly disliked by many consumers and professionals for its lack of clarity, but it's important to know that it exists. Before writing an offer, a buyer's Realtor can inquire to feel out the details and make sure the buyer is prepared for the situation. Writing an escalation clause on the initial offer in a multistage situation could put the buyer in a weak position during the second round. It's perfectly legal for a seller's Realtor, with the seller's permission, to reveal to all potential buyers what the top initial offer is and to ask everyone to beat it. In this case, the escalation clause would flesh out that buyer's maximum, and they would lose a competitive edge.
If you're considering an escalation clause, your Realtor is probably knee-deep in researching the circumstances around the seller's process of reviewing offers. The Realtor's knowledge of normal practices and probable outcomes in your market will make your offer much more likely to succeed. Escalation clauses can cause a lot of stress for home buyers, but when they're boiled down to the basics, they're fairly straightforward. Remember to be realistic, to be comfortable with how much you're willing to offer, and to confidently go after a home at that price. Buyers shouldn't be tempted to escalate their purchase price above what they are comfortable paying. At the same time, they should realize that inventory and interest rates are low, and aggressively pursuing a good home at a good price is necessary to winning in a competitive market. Potential buyers who are only looking to get a steal often end up not being buyers at all.
There are many potential problems if your home is priced higher than what comparable properties dictate. Here are a few tips to help you avoid this situation.
If you ask several agents how much they think you can get for your house, and one gives you a significantly higher number than the others, be cautious. The agent may be throwing out a high ball number just to get your business. A good agent will not fill you with false hope. Ask each agent for a Competitive Market Analysis (CMA). You want to choose the agent who can back up their suggested listing price with comparable sales data, not false promises that they can get you an unrealistic price. It's easy to hear a high number and get all excited, don't fall in the trap!
Sellers who aren't in a hurry often decide to test the market by listing their homes at a high price and waiting to see where the market goes. But in markets where home prices are dropping, waiting it out may actually cause you to lose money. It's key to price properly right out the gate because you have a greater chance of selling once your property just hits the market. Everybody wants something that's brand new, not been shopped around, and not on sale.
You’ve likely spent a lot of time, money and energy in your home over the years, so it’s natural to be emotionally invested in its sale. But, the biggest mistake sellers can make is to confuse prices or costs with property value. Just because a seller may have spent thousands of dollars on a wine cellar in the basement does not mean those costs will be fully recouped in the sales price. Buyers may not care about or value this amenity as much as the seller. Market value is determined by how the home is valued in the market, not by one individual. Sellers need to stay objective during the pricing process by focusing on the prices in the CMA.
There are some sellers who mistakenly believe that Zillow’s pricing estimates, called "Zestimates", and other online valuations tools can be used as a good gauge of estimating real estate market value. However, an online valuation tool is never going to replace a good real estate agent who knows the local market. Remember, Zillow has never seen the inside of your home and its condition, you will be surprised at how far off these estimates can be to the actual selling price of a property.
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If you’re looking to buy a property in the near future, you may be considering a condominium as a part of your search criteria. There’s so much to consider when you are deciding on whether to buy a condo or a traditional home. Condos can be great for the right buyers. You just need to be sure that your needs will be met by purchasing a condo. Hopefully, laying out the pros and cons will help you to make an informed decision that’s right for you.The Positives
There’s many great pros to buying a condo. For people who seek security and easy upkeep living, buying a condo can be great for the following reasons:
Security: Many condominiums offer gated communities with security staff on duty. In this way, living in a condo gives you a special sort of safe community feel.
Amenities: Condos also offer many different kinds of perks for owners. These can include a pool, a clubhouse, or community events. You won’t get all of these unique benefits living in a traditional house.
Maintenance: You don’t have to worry about maintaining your home or the surrounding areas. In a condo, someone else takes care of it for you! When your heating unit fails, it will be taken care of. This is one of the great benefits to this style of home.
Accessible prices: Condos are much more affordable than homes in many places. Purchasing a condo can be a great first step to home ownership.
HOA Fees: All of the amenities that condos carry come at a price. You as the homeowner cover the costs of maintenance and security in the community. This fee is paid on top of your mortgage payment. In some cases, the association fees can vary widely, so plan your finances accordingly.
Privacy: Living in a condo is similar to living in an apartment. There’s a lack of privacy that exists when you’re sharing walls with your neighbors. You’ll hear people going up and down the halls and fellow owners will be around you 24 hours a day. If you enjoy your privacy and space, condo living may not be for you.
Condos Have Rules: Living in a condo means you’re living under the management’s rules. You may not to be able to install the technology that you want like solar panels and satellite TV under the community regulations, for example. A condominium's home owner association may limit things like what you can do in your yard or hang on your door, and even animal restrictions.
The decision to buy a condo over a single family home is a big one. There’s many different things that need to be considered on an individual basis for your choice to be complete. Look at your decision from all angles. A condo could be a great pathway to home ownership for many people.
There are countless reasons a homeowner might want to sell their home and buy another. Some want to move for a change of scenery or to relocate for work. Others are parents with a recently empty nest who want to downsize to something more affordable that meets their needs.
The good news for second time homebuyers is that you already have an idea of what to expect when buying a home. The research, paperwork, disappointments, and delays that come with buying a home can all be prepared for. However, if you have the burden of selling your old home, finding a temporary place to live, and then moving into a new one, your responsibilities can be doubled or tripled.
In these tips we’ll go over how to prepare for selling your old home and moving into the new one, and offer some advice to keep you sane throughout this daunting (but exciting!) process.
For most homeowners, selling first makes the most sense financially, and especially in a competitive market. Holding onto a second house often means having to make two mortgage payments at once. Similarly, selling first will give you a much clearer idea of your budget for your new home.
Depending on market conditions, your home may or may not sell for as much as you were hoping. It’s important to keep this in mind before signing onto a new mortgage.
Once you sell your home, you’ll have to work out living and storage arrangements until you are ready to move into your new home. It may seem easy at first--just rent for a couple months until your move-in date, right? It isn’t always that simple, however, as deals can sometimes fall through and you can find yourself with a move-out date from your own home without having finalized a deal on your new home. Because of this, many homeowners elect to pay their current mortgage for an extra month or two until they can move in to their new home.
Research your options for short-term living and storage in your area. See if you can work with moving companies who will give you a discount for helping you move twice; once to the storage facility and again to your new home.
One way around this is to time your move out and move-in dates so that you don’t have to worry about storage. Some homebuyers will even move into the new home before officially closing on the home (i.e., take possession before closing). While this may be convenient, it can also be dangerous for the buyer and the seller.
Keeping track of all this information can be difficult, so don’t be afraid to keep a daily list or planner of the things you need to take care of, and never be afraid to reach out to your real estate agent who will be able to advise you on the best way to make your move as smooth a process as possible.
Buying a home is a very detail-oriented process, and there's a lot of important things you can overlook if you're not organized.
Home buyers generally have the opportunity to do a last-minute inspection of the premises to make sure everything's up to standards prior to closing on the property.
A real estate buyer's agent can accompany you on the final inspection or provide you with advice on what to look for.
If you've already visited the home a couple times and had the house professionally inspected, you're probably well-acquainted with any major malfunctions, flaws, or repair issues. In many cases, home buyers may reach an agreement with the seller to fix, replace, or make allowances for mechanical or cosmetic problems. While real estate negotiations and sales agreements are as varied as the people and properties involved, there are typically dozens of things buyers need to check on before they sign the final documents and accept ownership of the property.
As you're doing the final walk-through of the house, it's necessary to remember or have notes on the condition of the home when you last looked at it. You'll also want to have a clear idea of what appliances, fixtures, and window treatments are supposed to be remain in the house after it's been vacated by the seller. Depending on how close your final walk-through is to the actual closing, that has probably already happened.
If there's anything missing that the seller agreed to include in the sale, then that's an issue you'll want to discuss with your real estate agent or attorney. Any property damage that may have resulted from moving furniture and other belongings should also be discussed before final papers are signed. The same thing would apply to landscaping changes that appear to be inconsistent with the sales agreement. Your buyer's agent and/or lawyer can serve as intermediary in getting these issues clarified and ironed out.
To make sure your final inspection is thorough, it's a good idea to have a "final walk-through checklist" to help keep you organized and focused. You'll want to take a last-minute inventory of items that are supposed to be included with the property sale, such as appliances, lighting fixtures, furnishings, window treatments, children's play structures, hot tubs, and anything else that was agreed to in the sales contract.
Other items you'll need access to may include garage door openers, manuals for appliances and mechanical systems, warranties, invoices for repairs made, and remote control devices for things like ceiling fans, alarms, and other systems.
Your checklist and final walkthrough should focus on a variety of items, including the working condition of appliances, the electrical system, plumbing fixtures, and the condition of walls, floors, ceilings, doors, windows, and landscaping features. For a complete checklist, look online or consult your real estate agent.