Closing Costs and Escrow
Whenever a home sale is completed, there are several additional costs for the buyer in addition to the purchase price of the home. These costs include items such as fees for processing, title insurance, closing, title search, mortgage taxes and appraisals. Closing costs vary according to where you live because what is customary for the buyer and seller to pay is region-specific. A real estate agent or real estate attorney can advise you on what items you will be expected to pay in your area. You can reduce closing costs by negating some of them and simply refusing to pay others. Legal fees, appraisal charges and buy down points are items that can be negotiated. Document processing fees are administrative add-ons for mortgage companies and you should insist that they be waived.
A major portion of closing costs is establishing the escrow account for payment of real estate taxes. An escrow account is a savings account that the mortgage company will set up as a pre-payment buffer or cache for mortgage and property tax payments. Escrow monies are collected in advance so that they are always there when payments are due. For instance if the taxes on your new home are $4000 per year and they are payable on July 1st, and your closing date is January 1st your mortgage company will ask that you establish a $2000 or higher escrow account.
High closing costs can catch buyers off guard. You will need to plan to pay about 4% of the cost of your home in closing costs, depending on where you are buying. Some lenders have loan programs that allow you to roll the closing fees into the mortgage. This can be a good option if you do not have ready access to cash. Other options include down payment assistance programs. Many of these programs allow home buys to use funds for closing fees as well as for the down payment itself.
Another option for home buyers short on cash is a no-closing-cost mortgage. No-closing-cost mortgages have higher interest rates, so the lender makes more money in the long run. Therefore, such mortgage deals are not good options if you can avoid them. Even if you go with a no-closing-cost mortgage, you will still need to fund your tax escrow account. Additionally, you will still have to pay homeowner's insurance and per diem interest (the interest charged per day from the date of closing until the end of the month) at closing. So, "no closing costs" does not really mean that a home buyer pays nothing at closing; just less than otherwise.
An escrow account is an account maintained by a lender that is used to pay property tax and insurance once the mortgage has closed and the home has been purchased. Homeowners will pay 1/12 of their annual cost for insurance and taxes each month into this account, along with their mortgage payments. Most lenders will also require homeowners to keep extra money in escrow for unexpected increases in tax or insurance. This can be as much as two months of escrow payments. The lender will then make the insurance and tax payments to the relevant governments and insurance companies on behalf of the homeowner. Although escrow accounts are popular, they are not required by law. Homeowners can pay their insurance and property taxes out-of-pocket but a lender may require an escrow account as part of the mortgage approval process. The establishment of an escrow account may be negotiated with the lender.