Ask Andrew- CLOSING COSTS
Q: Please explain what closing costs are.
A: I like to explain closing costs as being like the taxes and tags that you pay when buying a car. Closing costs are basically the fees involved with making the transaction happen. These fees include items for the lender, reserves for taxes and insurance, title charges, taxes and recordation, HOA/Condo dues, etc. for the buyer. The seller’s charges are the brokerage fees, title charges, recordation and transfer taxes, etc.. The rule of thumb is that the closing costs for a buyer are roughly 3% of the sales price, give or take.
Brokerage Fees: The seller typically pays for both the buyer and listing brokers brokerage fees. However, the each party to the transaction could be charged an additional administration fee from their broker. An administration fee typically runs $250-$500 depending on the broker. The brokerage fees are a percentage of the sales price and that percentage is determined between the listing broker and seller at the time the listing agreement is signed.
Lenders fees: The buyer pays lender fees, which can include an origination charge, which is agreed upon when the buyer locks in his/her rate with their lender. An appraisal fee is typically paid before closing at the time the interest rate is locked in and typically runs $425. A credit report, which is roughly $100 give or take and a flood certification, which normally runs $25, are also charged by the lender to pay for these items.
Items Paid in advanced: This deals with the buyer pro rated interest. This is the interest that is paid in advanced so the buyer’s first monthly payment is a month or so after settlement, depending on the settlement date. The buyer also has to pay for their homeowners insurance for the first year up front.
Reserves: The reserves deal with starting the buyers escrow accounts if the buyer has chosen to escrow for property taxes and insurance. These reserves are to help organize the escrow accounts so the lender has enough funds to pay the taxes and insurance when they are due. If a buyer is escrowing for taxes and insurance, the buyer IS NOT to pay for their taxes or insurance if they receive a bill. The escrow accounts which a portion of the buyers monthly payment contributes to pay for them.
Title Charges: Both parties have title charges. The buyer pays for title insurance and has the option to pay for owners title insurance if they want. I HIGHLY recommend purchasing owners title insurance, which I can explain in another column. Both parties pay a closing fee and deed preparation. The closing fee is roughly $350 depending on the settlement company and deed preparation is roughly $250 depending on the settlement company.
Transfer and Recordation Taxes: Typically in Montgomery County, the transfer and recordation taxes are split equally between buyer and seller. So here is how it is calculated in Montgomery County:
- County Transfer Taxes: 1% of sales price
- State Transfer Taxes: 0.5% of the sales price
- State Recordation Taxes: $3.45 per $500 for all amount up to $500,000; $5 per $500 for all exceeding $500,000
**The first $50,000 use to calculate the State Recordation Taxes is exempt if the purchaser(s) is purchasing a primary residence.
- First Time Home Buyer- the buyer’s portion of the state transfer tax is waived.
Additional: The buyer could have additional charges for a survey, which could run from $200 to $1,000 depending on the type of survey chosen. If the property is within an HOA or condo association, condo/HOA dues may be due as well as a capital contribution for the building which is typically 2 months of the month dues for that association.
If you would like a more specific break down, please consult with your Realtor and a Settlement company.