The 1% Rule For Closing Costs - What's Really Included
Published June 8, 2016
When it comes to your home purchase, take every opportunity to understand the closing procedure, including determining which payments are important and which companies you want to employ throughout the process.
The process of closing a home can be confusing and expensive, with a variety of fees. By understanding what these fees are, and then making an informed decision, you can reduce these payments and secure the best final rate possible.
There’s no doubt about it – the closing process can be confusing, especially to first time homebuyers, Knowledge of the different that go along with buying a home will place you in a more powerful bargaining position when trying to get the best possible price for the house. In some cases you may get a seller, or even an agent to agree to split or eat some of these costs in order to make the purchase more desirable. That gives you some wiggle room when trying to determine and negotiate the final contract.
The rule of thumb is to save at least 1% of the purchase price for closing costs. Many people fail to do this, underestimating the amount that it will take to actually close on a home purchase. At the same time, failure to understand the scope and nature of these fees may lead to the lending company, or the broker sneaking in hidden or inflated costs among the piles of paperwork required for the process. Sticking to the 1% rule prepares you for the expense associated with this, while also giving you a guideline about home much you should actually have to pay at closing.
Appraisal Fees: Many times a lender will require a professional appraiser to inspect the property before they will be willing to complete a mortgage agreement. That helps them to ensure that the property is actually worth what you are paying for it. The cost for this process can range but is generally just a few hundred dollars, and should be a negligible part of the closing cost of most homes.
Attorney Fees: There are a variety of services that a lawyer can provide during the process of purchasing a home. This includes things such as preparing the mortgage and drafting the title. The price that the attorney charges you will vary based on the law office’s payment structure. It is generally recommended that you call several lawyers in order to get the lowest price possible. You should also attempt to ascertain exactly how much the fees for these services will be before retaining their assistance.
Inspection: This is a detailed inspection performed by a licensed professional, in order to determine if there is any existing or potential damage which either lowers the value of the home, or could make it unsafe and unsuitable for residential use. The scope of this report will vary depending on the size of the property, and the nature of the building itself.
Land Transfer Tax: When the ownership of a property is transferred from one individual to another there is a land transfer tax that is assessed by the local government. The cost of this fee will depend on the size and value of the property, as well as the specific city that it is located in. It's important to check all local tax laws ahead of time in order to determine exactly how much this will cost you during the closing process.
Prepaid Utilities: In some cases the former owner of the home may have paid for utilities, which will continue past the date of transfer of the property. In those situations it is generally necessary for the seller to compensate the buyer for the price of those services.
Property Survey: This is a service that inspects the actual property that a building is located on, in order to determine its exact scope, size, and boundaries. It also creates an official record of any major structures or visible easements that may exist on the land. This is important for determining exactly what is being transferred during the sale.
Title Insurance: This is an optional fee that helps to protect the buyer against problems that may exist with the title. This can resolve issues such as identity theft, liens against the property, fraud, and more.
Insurance For High Ratio Mortgages: If the down payment that you are making on the house is less than 20% of the value of the property then you will be required to pay an insurance payment premium at closing. This is a one-time fee, that can also be added to the principal amount of the mortgage itself. However if it is added to the mortgage then you will be required to pay interest on it at the same rate as the mortgage itself.
All of these fees will be small compared to the down payment and total cost of your mortgage. However they can add up, and can be a difficult burden to bear when already beset by a large financial investment. By following the 1% rule you can be prepared for these expenses by planning ahead. At the same time you will have the ability to shop around for each service in order to keep the process within your budgetary limits.