Buying a house? These fees are part of the process

Fees, fees, fees.

Closing costs are part of buying a house. They can’t be avoided, and the charges can easily run into the thousands of dollars. This primer will give you the basics on the fees you will pay beyond the purchase price of your new home. Some of them can be reduced — but only if you pay a higher interest rate on your mortgage.

What are lender fees?

These are fees to obtain the mortgage and are also known as loan origination fees or origination charges. (Other names that can be used are a loan estimate, an application fee, document preparation charge, a processing fee, underwriting fee and a broker fee.) Buyers in the Sacramento area typically pay $900 to $1,500 in charges, though many financial institutions offer discounts or credits for existing customers.

How much are appraisal fees?

The appraisal determines the value of your house, which affects how much money your lender will provide. The appraisal fee varies. A standard appraisal generally costs about $500, but that can increase based on purchase price, home size, location, property complexity, loan program, or whether the property is new construction or a resale.

What are title charges?

It is imperative you have a clear title to your residence, making sure there are no liens or conflicting claims on the property you are buying. These charges include title settlement fee, also known as the escrow fee, and the title insurance policy fee.

The title insurance protects a homeowner if problems develop later regarding title disputes. The settlement fee is the title company’s fee for service.

There are often two types of title policies, an owner’s policy and a lender policy. The owner’s policy protects the homeowner, and the lender policy protects the lender. The costs are determined by the purchase price of the home. The seller chooses the title company, and the fees are commonly split 50-50 between buyer and seller.

An example provided by the Sacramento-area SAFE Credit Union calculates the settlement fee at $958 based on a $620,000 house with a 20% down payment and a mortgage of $496,000. The owner’s policy would cost $849, the lender’s policy $1,970. Along with the title charges, the buyer will likely be charged courier fees of $25-$50, recording fees of $15-$30 and notary fees ranging from $100 to $250.

What is daily interest or upfront interest, and how does that affect closing costs?

Your house purchase will likely be funded before the date your actual mortgage payment is due. Let’s say your mortgage payment is due on June 1 but you are funded on May 20. In the example of the house with a mortgage of $496,000, if funding occurred on May 20, 11 days’ worth of interest would be collected through May 31. With an interest rate of 5.375%, daily interest would amount to $74.06. Over the 11 days, the total amount paid by the home buyer would be $814.66; this is collected as part of your closing costs.

Is there a way to lower the mortgage rate and monthly payments?

Discount points will lower the mortgage rate. This is a fee that may be offered to the buyer to purchase a lower interest rate. One point is 1% of the loan amount and will generally lower the interest rate by one-eighth to one-quarter of 1 percent The cost of a point can vary daily or even more frequently.

In the SAFE Credit Union scenario, lowering the interest rate of 5.375%, for a mortgage of $496,000, to the next increment of 5.25% would cost one-half of 1 point. This would amount to the homebuyer paying $2,480. The purchaser would save $38 a month in monthly mortgage payments, reducing the payment from $2,777 a month to $2,736. A homebuyer would need to live in the new home for 66 months — 5 1/2 years — to come out ahead.

Mortgage lenders say that if you plan to stay in your home less than five years, buying points is generally not financially advisable.

Is there a way to reduce closing costs?

Yes, but there is a catch. It’s called an origination or lenders credit. The lender will pay for some of the closing costs such as the home appraisal fee. In exchange, you agree to a higher interest rate. The more credits you accept, the higher the rate.

What about homeowners insurance?

Banks and mortgage companies want to protect their investment and make sure there are no lapses in coverage. They will require the first year’s premiums to be paid upfront, in the closing costs. Premium amounts vary, but SAFE Credit Union calculates a yearly premium of $960 for the $620,000 house.

What is an impound account, and it is required?

An impound account is funded at the closing of the loan with several months’ worth of the future property tax and homeowners insurance premium. Since the homeowners insurance is paid in advance for the first year, this would cover insurance premiums for the start of the second year.

Impound accounts are optional for most buyers, except for those whose down payment is 10% or less of the total purchase price. A typical account would consist of two to six months of property tax and two to four months of homeowners insurance premiums.

What are stamps, and how much do they cost?

Stamps are a fancy word for transfer taxes. Their cost varies depending on the location of your new home.

The city of Sacramento. for example, has a tax stamp of $2.75 for every $1,000 of the house price. A $620,000 house would result in $1,705 in transfer taxes. Typically the buyer and seller split the fee. Unincorporated areas of Sacramento County, on the other hand, have no stamps.

How about county recording fees?

They are required. Sacramento County charges $159, Yolo County $184, El Dorado County $147, and Placer County $141.

How much are home inspection fees, and are they necessary?

Most loan programs don’t require a home inspection, but most real estate agents and lenders recommend one. An inspector will spot any major problems with the property you are buying. Fees are usually around $500.

Do I need a home warranty?

A home warranty is not required, but many buyers of existing homes purchase one to insure against paying for unexpected major repairs like the heating and air systems or pool equipment. The cost is generally between $500 and $800, depending on what is protected. This cost is sometimes covered by the seller instead.

What will be my total costs?

Mortgage lenders and bankers say closing costs typically range from 1.5% to 5% of the purchase price, depending on the options selected.

Using the SAFE Credit Union scenario, a $620,000 house, with a $496,000 mortgage, would result in total fees of $13,352 or 2.69% of the loan amount. That assumes the home being purchased is in Sacramento city limits, with the additional tax stamp cost, as well as the buyer electing to have an impound account, home inspection and warranty.

Without an impound account, the closing cost would be $9,317, or 1.8% of the loan amount. This assumes the homeowner has good credit, with a FICO score of 740 or higher.