The ABCs of CLOSING COSTS

Tim James and Jeff James, Realtors
Prudential California Realty
1299 Prospect Street
La Jolla, CA 92037
Cell: (909) 702-3220
Email: drtimjames@prusd.com
http://www.homejames-california.com/
http://www.invest-in-california-property.com/

Around the world there are different procedures for transferring title to property. In some countries the process is handled between lawyers. In other countries it is handled through a notario. In many states of the United States, the process is handled "through escrow."

In California, the document used for a transaction involving the sale/purchase of a condo or home is the "Residential Purchase Agreement and Joint Escrow Instructions" or California Association of Realtors Form RPA-CA.

An escrow company is a neutral third party. Once Buyer and Seller sign the Residential Purchase Agreement and Joint Escrow Instructions, that contract is then turned over to the escrow company. Thus, the escrow company "opens" the escrow and oversees the process whereby both sides of the transaction execute their respective obligations.

On the day escrow "closes," the seller surrenders title to the property and the buyer surrenders the proceeds. By this time, both Buyer and Seller will have signed what amounts to a pile of documents. So, rather than have Buyer and Seller confront each other face-to-face during a time when emotions can overpower reason, the escrow company acts as the neutral intermediary.

During the escrow process, many activities take place and each of these generally produces a charge that either the buyer or seller must pay - as is called out in the contract. It's these various fees associated with an escrow that often seem mysterious, so in an effort to help clarify the situation, I have written this paper.

First, understand that these costs are both mortgage-related and government imposed. Although these fees may vary by locality, here is a breakdown of the most common ones:

APPRAISAL FEE

This fee pays for the appraisal of the property. Buyers may have already paid this fee at the beginning of the loan application process, or it may show up in the final escrow statement.

CREDIT REPORT FEE

This fee covers the cost of the credit report required by your lender. Likewise, this fee may have been paid up front when you first applied for your loan or it may show up in the final escrow statement.

LOAN ORIGINATION FEE

This fee covers your lender's loan processing costs, and it is typically around 1% of the total mortgage.

LOAN DISCOUNT

This fee is a one-time charge if you have opted to pay "points" to lower your interest rate. Each point you purchase equals 1% of the total loan. This is also called "buying down your loan."

TITLE INSURANCE

These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous services provided by your title company.

PMI PREMIUM

If you buy a home wih a low down payment, your lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20% equity in the home, however, he or she can normally apply to the lender to eliminate this insurance.

PREPAID INTEREST FEE

This fee covers the interest payment from the date you purchase the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it toward the end of the month. This is the fractional payment, and it depends on the amount of time until your first normal payment comes due.

ESCROW ACCOUNTS

Your mortgage lender can start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months of homeowner's insurance premium will be collected. In addition, taxes equal approximately two months in excess of the number of months that have elapsed in the year are paid at closing. (If 6 months have passed, 8 months of taxes will be collected.)

RECORDING FEES and TRANSFER TAXES

This expense is for recording the documents pertaining to mortgages and the transfer of ownership of the property.

Make sure you consult with a real estate professional to find out which fees - and how much - you will be expected to pay during the closing of your prospective home. Keep in mind that you can negotiate these costs with the seller during the offering stage.

As a potential home buyer, there is information you will need to understand about the process of closing an escrow.

Also called "the settlement," the closing is the process of passing ownership of property from Seller to Buyer.