What the Heck are Closing Costs?
This might be one of my favorite posts ever! We’re about to dive deep into closing costs, so buckle up and get ready for some knowledge! Closing costs are a question the Magical Moves team and I receive on a daily basis. What are closing costs? How much can I expect to pay? Who am I paying this money to? All excellent and important questions.
“Closing costs” refer to any fee charged to a buyer or seller when purchasing a home. Think of closing costs as a fee to purchase a home. There are so many moving parts to purchasing a home! All of the providers that facilitate the transaction are paid for their services and known collectively as closing costs.
Below, I have an “American Land Title Association Settlement Statement,” also known as an “ALTA.” An ALTA is a document both the buyer and seller receive a few days before closing that provides an itemized list of all money charged and received by the buyers, as well as all money charged and received by sellers. Take a moment to familiarize yourself with the right side of the document in the highlighted box. This is the list of all items charged to the buyer. Please review before reading on.
As a buyer, the goal of the ALTA is to subtract the “credits” from the “debits.” (located in the pink box on the last page) The difference of these two amounts is the total cash due from the buyer, INCLUDING the down payment. (located in the green box with a star)
The following description will only cover what is charged to the buyer, for simplicity sake. Let’s take a look at what you can expect to pay as a buyer!
SECTIONS OF THE ALTA
SECTION 1.) HOME PRICE AND LOAN AMOUNT
The buyers are charged $322,000 dollars, the price of the home. The buyers already paid a $3,000 earnest money deposit, which is why it’s listed as a credit, directly to the right. The bank will also “give” or credit the buyers $273,700, the loan total, at closing. If we subtract the loan amount from the price of the home, we get a down payment amount of $48,300, which is not listed on the ALTA.
SECTION 2.) PRORATIONS AND ADJUSTMENTS
This section includes HOA dues and county taxes, as well as any money given “concessions” from the Realtor or lender (in this case me) to the buyers. Note that the buyer was credited $1,164.02 from the sellers for property taxes. The new buyer will pay the entire calendar year’s property taxes next year.
SECTION 3.) LOAN CHARGES
This is best explained by your lender, but you can count on paying for an appraisal fee, processing fee, and underwriting fee to most lenders. The buyers also elected to spend more money up front to lower their interest rate ($3,079.13)
SECTION 4.) IMPOUNDS
Also called “Escrow,” this is the amount the buyer pays for home insurance and certain taxes. This money is put into a “savings account” for your lender to use in the future towards your mortgage. The lender will use this money each month to pay your taxes and home insurance, included in the mortgage. Just like car insurance, you must take out an insurance policy first, and pay monthly on the policy. You can’t be insured without first paying. City taxes are also included here. It looks like they overestimated, and received a discount adjustment of $660.93.
SECTION 5.) TITLE CHARGES
The title company makes sure closing fees are accurate, and accounts for all funds during the transaction. They created this ALTA. They also make sure no one else can claim ownership of your home. As a buyer, count on always paying a title closing fee, lien search, survey, and lender’s title insurance.
SECTION 6.) GOVERNMENT AND TRANSFER FEES.
These are government fees you can’t escape 🙂
SECTION 7.) MISCELLANEOUS PAYMENT ITEMS
In this section, the buyers paid a mortgage insurance premium (because they need a minimum of 20% down payment to remove this, and they had only a 15% down payment) They also paid for a home warranty, and the next month’s HOA in this section.
There you have it! The complete huge document has been broken down! If you look at the green box, the buyers paid a total of $56,013.25 out of pocket. This number was found by subtracting the two numbers in the pink box right above. If you remember in the “Section 1” paragraph, we calculated that the buyers are paying $48,300 or 15% down on the home, combined into the total cash to close of $56,013.25.
Is we subtract the total cash to close ($56,013..25) from the downpayment we calculated ($48,300) we have a total closing cost of $7,713.25. The rule of thumb I use for estimating closing costs (on a resale home, not a brand new home) is about 2%. This number falls slightly higher, but only because the buyer made optional selections like purchasing a home warranty and paying more money to lower the interest rate.
Understanding closing costs is difficult because there are so many variables involved, but I hope this article helps you understand the overall components, as well as what makes up closing costs. If you’re looking for more information on moving to Orlando and Disney, I recommend checking out our instagram or our facebook group. If you’re looking for real estate services, feel free to reach out to myself or the Magical Moves team at Eric@magicalmoves.com or voice/text at 407-900-4220! See you real soon!
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