Cash at close more than just closing costs

By William Kugel

I am frequently asked by buyers, when they are shopping for a mortgage, "How much are the closing costs?" While this is an important question it tells the buyer only part of what they really need to know. The bigger question is, "How much money will I need at closing to pull off this transaction?" I also find, quite often, that when buyers tell me that they have a specific amount of money to put down, that what they really mean is that this is the entire amount of money they have to pull off their purchase. In this article I'll help you get to the bottom line of how much it takes to close and the various places those funds can come from.Purchasers, especially first-time home buyers, often get confused about what is meant by the term "closing costs". The distinction between these two questions is vitally important if a buyer is to plan correctly. Nothing is more disconcerting than to find out at the eleventh hour that the amount of money you need at the closing is more than you expected. As a matter of course, I always try to volunteer this information at the time I go over closing costs. What I explain is that when a buyer comes to the closing table, he or she will be bringing as many as four or more categories of monies: The down payment. This will be your equity in the property at the time of purchase. Sometimes the down payment is expressed as a percent of the purchase price. For example, ten percent down on a purchase of $100,000 would be $10,000. Closing costs. The closing costs are the expenses involved in making the purchase happen. Closing costs are defined as one-time expenses and are to be distinguished from the ongoing expenses of ownership of real estate. The closing costs represent fees paid to third parties during the course of the purchase. They may include inspections, appraisals, credit reports, lender's fees, title insurance, attorney's fees, title search, recordation fees and other miscellaneous items. One of the largest items in this list in this state is the state transfer tax. It is presently figured at $15.00 per thousand and by law is split equally between the buyer and the seller. The buyer's half on a purchase of $100,000 is $750. Prepaid expenses. The ongoing costs of real estate ownership are called prepaid expenses. The three most common of these items are real estate taxes, fire insurance, and interest on the mortgage loan. Some other items that may appear in a list of prepaid expenses are private mortgage insurance (PMI) and homeowner's association dues. These prepaid items become a part of the total amount of money you need to close a purchase because often the only time and place they can be taken care of is at the closing. For example, mortgage payments include interest which (unlike rent) is paid in arrears. Your first mortgage payment will commence in the month following the first complete month after the closing. If your closing is scheduled for say September 15th, your first payment will be due November 1st. The November 1st payment includes the interest due for November. The interest due from the time you own the property on September 15th until the 1st of November is often referred to as "the odd-days interest". The only time this money can be collected is at the closing. Other ongoing costs include taxes and insurance and, especially when escrows are required, you will be prepaying some of these expenses at the close. The closing agent, usually a title company or closing attorney's office, has the responsibility of contacting the taxing authority and figuring out when the taxes are due. Based on the last tax bill, the lender will calculate how much can be accumulated in monthly payments until the tax bill is due and add a small cushion (usually two months) to allow for changes in the tax rate. The shortfall will be collected at your closing. Reimbursements due the seller. Another item that is often overlooked when planning the amount of money needed to close is reimbursements. The seller may have prepaid some expenses, such as taxes or homeowner's association dues or a water bill, for a time that extends into your period of ownership. Sellers also will typically prorate utilities. It is common practice to top off the heating oil tank and bring the bill to the closing for settlement. These are the four most common categories of monies that comprise the total monies required at a closing. There could be other miscellaneous items as well. An example is a membership transfer fee. A popular development in the area is built around a golf course and country club. As ownership to the units pass, so does the country club membership fee that will show up on the closing statement. If you haven't been prepared for such items, they will come as a surprise. So, as you can see, calculating how much you will need at closing is not as simple as thinking down payment plus closing costs. You need to learn to think down payment, closing costs, prepaid expenses, reimbursements due the seller and possibly some miscellaneous costs. It is best to plan for these costs from the start. Some of these costs may be offset by credits and should be figured in to your bottom line as well. With the help of your Realtor, your lender, and your closing agent, you can be well informed and well prepared. If you are buying directly from the seller, you may find these tasks far more challenging. Good luck. William Kugel is author of the column MORTGAGE$ in publication for 12 years, a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may write him c/o of The Conway Daily Sun, visit the web site www.gmacm.net/william_kugel or send e-mail to william_kugel@gmacm.com.All Rights Reserved. Copyright 2002, W.H. Kugel.