Closing costs are those expenses associated with the purchase of a property other than the contract down payment. Closing costs fall into two major categories: Bank Related Expenses and Title Related Expenses.
Bank Related Expenses – These expenses are those incurred in obtaining the mortgage to complete your purchase. They include:
Points – A point, equal to one (1%) percent of the amount of the mortgage, is a fee paid to either the lender, or its designate (in the case where a mortgage broker has placed the loan), for the opportunity to obtain a mortgage loan from that lender. Points are 100% tax deductible when the mortgage is used to purchase a primary residence.
Mortgage Bank’s Attorney – Unfortunately, a Purchaser is customarily obligated to pay the Bank attorney’s fee, in addition to their own attorney’s fee, as a condition of obtaining the mortgage. This fee ranges from $400 to $700 depending on the lender.
Tax Escrow – Most lenders will undertake to pay the real estate taxes on properties it grants mortgages against. In order to have sufficient monies to pay these taxes, a lender will require a Purchaser to deposit 1/12th of the annual real estate tax bill in an escrow account with the lender, along with the monthly mortgage payment. In addition, a Purchaser will be required to make an initial deposit, usually equal to 50% of the annual tax bill, in order to have sufficient funds set aside to make the first tax payment after closing of title.
Private Mortgage Insurance (PMI) – Anytime a Purchaser borrows in excess of 80% of the purchase price from a lender, that lender will require that the Purchaser obtain private mortgage insurance from a third party provider. The Lender will arrange for this coverage and pass the cost through to the Purchaser. This coverage must remain in place until the principal balance of the mortgage falls below 80% of the value of the property. The first year’s premium must be paid at closing, and varies according to the amount of the mortgage.
Homeowners Insurance – A Lender will also require that a Purchaser maintain homeowners insurance in an amount necessary to replace the dwelling house. In addition, most lenders require that the first year’s premium be paid in advance of the closing.
Misc. Fees – Lenders shall also assess various fees depending upon their internal procedures. Some of these fees include: Tax Service Fees, Document Preparation Fees, and Application and credit Fees. These fees vary depending on the particular lender.
Title Related Expenses – These expenses are those required to complete the transfer of title and to record the necessary documents associated with the closing. They include:
Title Insurance -Required by all mortgage lenders, title insurance guarantees that the Purchaser is obtaining good and marketable title from the Seller. This one time expense, set by statute, varies according to the purchase price of the home and the amount of the mortgage.
In New York, Purchasers must also pay the following fees during closing.
Mortgage Recording Tax (MRT) – Anytime a mortgage is recorded in the State of New York, there is a one time fee assessed against the Purchaser. In New York City, the fee is equal to 1.75% of the amount of the mortgage, less $25.00. The fees in the outlying counties vary, depending upon the local regulations, with a minimum of .75% of the amount of the mortgage, less $25.00. This “tax” is not tax- deductible.
Recording fees – In addition to the MRT, the Purchaser is obligated to pay a nominal fee to the County Clerk to record the original mortgage and deed. This one time expense is approximately $100 to $150, which varies according to county.
New York Mansion Tax– New York buyers are also required to pay a 1% tax on the property purchase price on property worth over $1 million.