When one is purchasing a home, a purchaser needs to know is how much money must be brought to the closing. It is not as simple as the purchase price is $625,000, we put down $62,500.00, and will be getting a $500,000 mortgage, therefore we must bring $62,500.00, or the remaining 10% of our down payment. That is all true, but there are other expenses. These other expenses are referred to as “closing costs.” The current owner of the property (Seller) will have made property tax payments (these are sometimes part of the monthly mortgage payment), and perhaps purchased fuel oil for heating purposes. When the closing date is set a tally of debits and credits are compiled. In this example the closing takes place on July 15th. Also in this example school tax is taxed on a fiscal calendar year of July 1 – June 30th, but not due until September 1st, and the village and town taxes are taxed on a calendar fiscal year. There are 170 days from the closing date until December 31. The adjustments might look something like the following:
Seller credits
Sales price: $ 625,000.00
Credit for village tax paid by seller (170 days @ $8.38): $ 1,424.60
Credit for town tax paid by seller (170 days @ $10.13): $ 1,722.10
Fuel in oil tank (165 gallons @ $3.00 per gallon) $ 495.00
____________
Total due seller $ 628,641.70
Purchaser credits
Down payment $ 62,500.00
Credit for school tax incurred but not yet taxed (14 days @ $28.07): $ 392.98
____________
Total purchaser credits $ 62,892.98
Adjustments are computed as of 11:59 p.m. the day before the closing. Since the school tax period begins on July 1, at the day of closing 14 days of that period has elapsed. It is the Seller who is responsible for this portion of the tax. However, the tax will not levied until September 1. The purchaser will pay this tax when it is levied, as they will be the owners of the property at that time. The Seller is reimbursing them in advance at the closing for the 14 days. Because it is unknown what the actual tax will be until September, the current rate is used to make the adjustment. In this example the amount that the Purchaser must bring to the closing is the difference between the total due Seller and Purchaser credits, $628,641.70 – $62,892.98, or $565,748.72.
Okay, and you are getting $500,000 from the bank so you need to bring $65,748.72. Not so fast. The bank will deduct their fees right off the top, (more closing costs) determining the mortgage amount available to the Purchaser at closing (“net available proceeds”).
Below is an example of what this might look like:
Mortgage costs:
Pre-paid interest to August 1, 20xx (17 days @ $45.50) $ 773.50
Commitment fee $ 300.00
Initial tax escrow reserves $ 3,931.53
Credit report fee $ 15.00
Appraisal fee $ 435.00
Tax service fee $ 88.00
Bank attorney fee $ 575.00
Total mortgage costs: $ 6,117.53
No two banks charge the same fees. The fees listed above are some common fees. Most banks prefer to pay the home’s property taxes themselves. If it is agreed that you will pay the taxes yourself the initial tax escrow reserves charge will not be deducted from the proceeds, but you may still have the tax service fee. Some of the mortgage closing costs are collected in advance. It is not uncommon that the appraisal would have been paid prior to the closing and therefor not deducted from the proceeds. This may be noted as POC (“paid outside of closing”). In this example the amount that must be brought to closing has now risen from $65,748.72 to $71,866.25.
Closing costs are also comprised of the fees paid to the title company. The title company has searched the property records and provided a title report. They will issue a title policy which is an insurance policy insuring among other things that the title to your home is “clear”, or free from any liens/judgments or boundary line issues. This policy is purchased once and remains in force for the duration of the time that you own your home. The cost of the title policy is directly related to the cost of your home. You will also be purchasing a policy for the lender (Lender’s Policy) that is similar to your policy (Owner’s Policy). The charge for the Lender’s policy will be reduced when both policies are purchased at once. This is called a simultaneous fee and mortgage policy. The Lender’s Policy will be charged at approximately one third the rate of the Owner’s Policy. As an example I have provided a sample bill generated by the Judicial Title website (www.judicialtitle.com) – Click Here
The actual bill will not be precisely this as some things may not apply. Note that the owners policy cost, called fee insurance, is $2,565. The lender policy cost, called mortgage insurance, is $633.00. There is a space for real estate taxes. In our example the estimated School tax would most likely need to be paid at the closing, as it would be due within 60 days of the closing date. (Closing July 15, tax due September 1.) Since the actual amount which will be levied is not known, title companies customarily collect approximately 15% over the current tax to make this payment. Excess funds are refunded to the Purchasers after actual tax is paid. Additionally, the purchaser pays the costs to record the deed, and mortgage, plus a tax levied based by NYS on the mortgage amount. In some municipalities (e.g. Yonkers, Mount Vernon) a separate mortgage tax payable to the city is also paid.
The $71,866.25 will rise again based on your title bill. Many attorneys will find out the amount of the bill shortly before closing and advise their clients to bring a separate check payable to the title company.
This is not an exhaustive summary of all closing costs. This post is to give an idea of what comprises closing costs, and to emphasize that it is not only the cost of the property minus the mortgage amount that determines what funds need to be brought to closing.
