Understanding Closing Costs From the Buyer's Viewpoint

If you are thinking about buying a house, you will need to understand about the closing costs that are typically involved in any real estate purchase. In some cases the seller will pay part of these costs if you negotiate it, although there are some things that normally get paid by the buyer.

In better economic times, sellers might have paid a larger portion of the closing costs out of their equity in order to work with a buyer who was short on the down payment. These days, a lot of sellers may not have enough equity. In addition, a lot of potential buyers will use housing tax credits which can help them make the down payment.

Following is a list of typical closing costs.

1. The credit report fee is simply the cost to get your credit reports. It is usually under $30. It is usually paid when you fill out the application for your loan, but it is sometimes included with the rest of the closing costs. Most of the time the credit report fee can be included in the mortgage application

2. An appraisal fee covers obtaining a professional appraisal on the property. This fee is paid by the buyer. It can vary over quite a wide range depending on the area, but it is usually under $300. This can also be paid at the time you put in loan application, or it could be carried forward to come due at closing.

3. Title search fees, which can be around $15 to assure clear title and title insurance fees, to purchase title insurance. Title insurance is designed to protect against claims made on the title. The title fee is computed on a percentage of sale price and can vary depending on the title insurance company, but you can figure it will be approximately 1% of value.

4. Loan origination fees and "discount points." an origination fee can be anywhere from 0.5% (half a point) to 2% (two points) of the loan amount. It covers the cost of providing the loan. Discount points, on the other hand, are a percentage of the home loan value paid which may be used to buy down the loan rate. This is a prepaid interest to give you lower monthly payments. This can be used to get you to a level qualifying on an income to debt ratio that the lender will approve.

5. Recording and document fees. These fees are charged for the recording of the deed or deed of trust in the government jurisdiction (also know as "Land Titles). Some provinces have a document stamp fee or transaction tax.

6. Pro-rated property taxes, insurance, homeowner's association fees and other recurring costs of ownership are split on the percentage of the year that you own the home. Normally you can expect to pay a full year's insurance premium in advance, and then your pro-rata share could end up being a credit that the seller reimburses you. The difference may also be held in escrow accounts, in which case the lender might require one year, plus one additional month.

7. The best way to estimate your closing cost is to calculate 1% to 1.5% of the purchase price.