First-time homebuyers in Cape Coral may be surprised to learn that they need more than just “down payment money” to buy a home. So what do closing costs include? Below are a few short descriptions of costs that are relevant in the state of Florida.
What Do Closing Costs Include?
In a real estate closing, you have reached the finish line of the purchase transaction. At this stage, you and the seller sign documents, money is disbursed, and your deed and associated property documents are recorded with the Clerk of Court.
An explanation of what do closing costs include focuses on many of the actions taken by you, the seller, and lenders between acceptance of an offer and closing. Below are some of the common closing costs paid by buyers.
Originating the Loan
Lenders charge prospective borrowers an origination fee – a small percentage of the loan amount – for processing and making the loan. As a subset of origination costs, the lender may assess an application fee and underwriting fee. When a lender underwrites your loan, it reviews your income, debts, assets, and credit history to assess the risk that you will default on the loan, decide whether to approve your loan and set the interest rate and other terms of the loan. You likely will see a credit report fee as a portion of the closing costs.
As part of the mortgage application, the lender charges a flood certification fee for the lender to verify that the subject property does not lie in a Federal Emergency Management Administration (FEMA) flood zone. If the home does and the federal government guarantees your loan, you will have to obtain flood insurance.
As a buyer, you want assurance of a clean title. A lender will insist upon it before funding the transaction. Part of your closing costs goes to paying for a title search. In such an examination, a settlement agent (who, in Florida, does not have to be an attorney) will determine if your seller is, in fact, the record owner of the property and whether there exists mortgages, judgments, liens, and other claims to the property. These liens include those assessed by municipalities for items such as assessments for water, sewer, and other services to the property.
We mention title insurance premiums as part of what do closing costs include. This insurance covers your or a lender’s costs to defend claims against your title and any damages arising from title defects. An owners’ policy affords protection for buyers. If you have a mortgage, your lender will require that you pay for a separate lender’s policy.
Getting on Record
You typically will be responsible for the recording fees charged by the Lee County Clerk of Court for your deed. The fee is $10 for the first page, with an additional $8.50 for each page thereafter. Also, you will have as a closing cost a documentary stamp tax. This transfer tax is set at 70 cents per every $100 (or portion of $100) at the purchase price. For instance, if your home’s price is $200,000, you will have a stamp tax of $1,400.00. If your deed has two pages, you add $18.50 for the recording fee. That totals $1,418.50 for the costs to record your deed.
The Worth and Condition of the Property
Closing costs also pay for services that seek to protect buyers and lenders against problems with the home’s condition or value.
An inspection fee covers the cost of a home inspector. If you’re buying a pre-owned home, an inspector will examine the home for potential defects such as cracks, water stains, visible mold, leaks, exposed wires, and inadequate insulation in attics, floors, or pipes. A home inspector can benefit you even with new construction. The building code inspectors typically do not concern themselves with the aesthetics of the home or defects that do not rise to a code violation level.
Lenders generally require that your home appraises at a certain value, usually above the loan amount. With an appraisal, the bank can determine if its collateral – the home – is sufficient to pay the loan balance in the event of a default or loss of the home. Your closing costs include the appraisal fee also because the value determines whether your down payment reaches or exceeds the 20 percent threshold to avoid private mortgage insurance (PMI).
Protecting the Home and the Mortgagor
The PMI mentioned above is a type of insurance covering losses to your lender should you default on the loan. Your lender will require PMI if your down payment is less than 20 percent of the home’s price or appraised value. If you must have it, the PMI premium will constitute part of your closing costs.
Your closing costs likely will include the initial homeowners’ insurance premium. Lenders mandate the insurance and require that borrowers name them as parties who will receive the proceeds (up to the balance of the loan) if the home is destroyed by fire or some other calamity. Even if you don’t plan to have a mortgage, homeowners’ insurance can prove valuable in protecting your investment and avoiding headaches if you have to find another home.
Points of Interest
Loan or mortgage points represent the upfront price for lowering your interest rate – the lender charges at closing one percent of the loan amount for each percentage point of rate reduction. By illustration, if you borrow $200,000, a reduction of the interest rate by two points from six percent to four percent would cost $4,000 at closing (0.02 multiplied by $200,000).
These closing costs reflect the buyers’ and lenders’ efforts to protect their interests. Appraisals, insurance, credit checks, and underwriting help preserve the lenders’ ability to be repaid on loans. You likewise benefit from many of these items, even if you don’t go the mortgage route.
If you want a more in-depth breakdown for your particular circumstances – in other words, what do closing costs include for you specifically – feel free to contact us. Cape Coral Mortgage has over 20 years of experience in the Cape Coral market.