Ask McEnearney: What are residential closing costs and how do they affect me?

This week’s Q&A column is sponsored and written by Brian Bonnet, Senior Loan Officer (NMLS ID# 224811) of Atlantic Coast Mortgage, LLC (NMLS ID# 643114). To learn more about current mortgage rates and the home loan process, contact Brian at 703-766-6702 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.

Question: What are residential closing costs and how do they affect me?

Answer: One of the realities associated with the purchase and financing of residential real estate is the fact there will be transaction costs generally referred to as closing costs. Understanding, well in advance, what those costs will be is useful in planning for the purchase.

Transaction costs can be broken down into two broad categories — closing costs and prepaid/escrow expenses. Closing costs include fees charged by the lender, fees charged by the settlement company, and fees charged by state and local jurisdiction where the property is located.

Lender fees often include charges for the appraisal, credit report, processing fees, flood certifications and tax service fees. The total charges generally run between $1,800 and $2,300. Appraisal fees will vary depending upon the value of the appraisal and the complexity of the appraisal effort.

Settlement company charges generally include fees for their service, fees associated with the title search and preparation of the title binder, and lender’s and owner’s title insurance. Not including the cost of the title insurance, the settlement company fees usually total between $800 and $1,000.

Title insurance costs are driven by the sales price of the property, whether the borrower chooses to purchase owner’s title insurance, and further, whether the borrower chooses standard or enhanced owner’s title insurance. For a $300,000 purchase price with standard owner’s coverage, the title insurance costs would be somewhere between $1,550 and $1,700. At a price of $600,000 with the same election, the costs would range from $2,850 to $3,000. At a sales price of $1 million, the title insurance costs would range between $4,550 and $4,800. If the borrower chooses to purchase the enhanced type of owner’s title insurance, the total title insurance costs would be higher at all price points.

State and local jurisdiction costs vary from location to location and are also determined by the sales price and loan amount. In Virginia at a sales price of $600,000 with 20% down, the tax stamp cost would total $3,600. In Montgomery County, Maryland, the transfer and recordation taxes at that same price point and loan amount would total $6,955. In Washington, D.C., the recordation tax would be $8,700. Maryland and The District do offer some discounts for first-time purchasers in their jurisdictions.

The last group of costs associated with the purchase of residential property are prepaid and escrow expenses. If the purchaser is obtaining a mortgage loan, he/she must also obtain homeowner’s (hazard) insurance, which will vary in cost based on the price of the property. The premium for the first full year is generally collected at the time of settlement. In addition, three months of the annual premium are collected at settlement and placed in the borrower’s mortgage escrow account to ensure enough will be available the following year to cover the second-year premium. The borrower will also be responsible for covering any property tax due to the seller and the amount required in the escrow account necessary to cover the next real estate tax bill.

Lastly, if the property is a condominium or located within a homeowner’s association, the purchaser will be responsible for any refund to the seller of monthly dues, which had been paid in advance and for any fees required by the homeowner’s association.

If you would like more information to help plan your next move, please contact Brian Bonnet at [email protected] or call 703-766-6702.

If you would like a question answered in our weekly column or to set up an appointment with one of our Associates, please email: [email protected] or call 703-549-9292.

McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria