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The first part is the remainder of the Total Down
Payment: what you did not already pay when you made your offer
or signed contracts. You may have already paid your full down
payment.
The second category includes actual out-of-pocket closing costs
for the loan and the legal costs associated with closing that
loan. Information line #72 provides a summary of these costs,
which vary with the loan amount. These costs can be determined
with certainty at time of application for your mortgage loan.
Unquowa Mortgage Services will provide you with an exact listing
of these costs. One of the largest of these costs is "points"
paid for a mortgage program. As a result, if you are seeking
to minimize closing costs the first step you should take is to
choose a 0 point option for your mortgage loan program.
The third category does not involve the lender and includes adjustments
between the seller and the buyer for items such as property taxes
and utilities. For example, if the seller has paid for a recent
oil tank filling but there is some oil left in the tank, the
buyer is usually expected to pay for this oil. At closing, there
would be a credit due to the seller for this oil. Your attorney
can best summarize the probable amount of these costs.
The fourth and most misunderstood area of closing costs is the
prepaid, or reserve items category. These involve any or all
of the following items:
Property Tax
Hazard Insurance
Mortgage Insurance
Flood Insurance
For each item that is required to be a part of escrow
payments, the borrower must prepay a portion of these on-going
expenses to the lender. In this way, the lender will be able
to make payments to the appropriate entity with your escrow funds.
For property taxes, 2 to 6 months is usually required at closing
depending on when the next tax payment is due. The hazard insurance
policy must be paid for one year in advance, and usually 2 months
payments toward the following year's premium must be prepaid
at closing. Mortgage insurance can now be paid on a monthly basis
and does not require a full year's premium to be paid in advance.
This advantage can save you hundreds of dollars at closing if
you need mortgage insurance. Flood insurance works the same way
as hazard insurance if it is needed.
As you can see, the amount of these prepaid items depends in
large part on the actual cost of property taxes and insurance.
The taxes depend on the home you purchase. Hazard insurance you
purchase. The goal of the lender in establishing these reserves
is not to just hold on to more of your funds. The goal of the
escrow is to have enough funds available to pay each cost when
due even if you miss or prices increase slightly. In fact, the
state of Connecticut requires that you be paid interest on any
funds held in your escrow account, so in effect it is your own
savings account.
It is the great variation in the costs of the prepaid items that
creates the greatest uncertainty regarding the exact funds you
need at closing. All of our disclosures will always give you
what amounts to the worst case scenario, with maximum possible
estimates for each item.
To get as close an estimate as possible of the funds you need
to bring to closing, you should work closely with your mortgage
lender and your attorney during the application process.
Please note that if a condition of your loan is that you must
have 2 or 3 months of mortgage payment reserves in savings after
closing costs, you must provide evidence of those funds prior
to closing based on actual closing costs. You do not have to
do anything with these funds and immediately after closing you
may expend them however you wish.
Michael Licamele is the Editor of MortgageAlmanac.com
and President of Residential Finance Network at rfnc.com.
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