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How Much
Money Will I
Need for
Closing?

by Michael Licamele

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The first part is the remainder of the Total Down Payment: what you did not already pay when you made your offer or signed contracts. You may have already paid your full down payment.

The second category includes actual out-of-pocket closing costs for the loan and the legal costs associated with closing that loan. Information line #72 provides a summary of these costs, which vary with the loan amount. These costs can be determined with certainty at time of application for your mortgage loan. Unquowa Mortgage Services will provide you with an exact listing of these costs. One of the largest of these costs is "points" paid for a mortgage program. As a result, if you are seeking to minimize closing costs the first step you should take is to choose a 0 point option for your mortgage loan program.

The third category does not involve the lender and includes adjustments between the seller and the buyer for items such as property taxes and utilities. For example, if the seller has paid for a recent oil tank filling but there is some oil left in the tank, the buyer is usually expected to pay for this oil. At closing, there would be a credit due to the seller for this oil. Your attorney can best summarize the probable amount of these costs.

The fourth and most misunderstood area of closing costs is the prepaid, or reserve items category. These involve any or all of the following items:

Property Tax

Hazard Insurance

Mortgage Insurance

Flood Insurance

For each item that is required to be a part of escrow payments, the borrower must prepay a portion of these on-going expenses to the lender. In this way, the lender will be able to make payments to the appropriate entity with your escrow funds. For property taxes, 2 to 6 months is usually required at closing depending on when the next tax payment is due. The hazard insurance policy must be paid for one year in advance, and usually 2 months payments toward the following year's premium must be prepaid at closing. Mortgage insurance can now be paid on a monthly basis and does not require a full year's premium to be paid in advance. This advantage can save you hundreds of dollars at closing if you need mortgage insurance. Flood insurance works the same way as hazard insurance if it is needed.

As you can see, the amount of these prepaid items depends in large part on the actual cost of property taxes and insurance. The taxes depend on the home you purchase. Hazard insurance you purchase. The goal of the lender in establishing these reserves is not to just hold on to more of your funds. The goal of the escrow is to have enough funds available to pay each cost when due even if you miss or prices increase slightly. In fact, the state of Connecticut requires that you be paid interest on any funds held in your escrow account, so in effect it is your own savings account.

It is the great variation in the costs of the prepaid items that creates the greatest uncertainty regarding the exact funds you need at closing. All of our disclosures will always give you what amounts to the worst case scenario, with maximum possible estimates for each item.

To get as close an estimate as possible of the funds you need to bring to closing, you should work closely with your mortgage lender and your attorney during the application process.

Please note that if a condition of your loan is that you must have 2 or 3 months of mortgage payment reserves in savings after closing costs, you must provide evidence of those funds prior to closing based on actual closing costs. You do not have to do anything with these funds and immediately after closing you may expend them however you wish.


Michael Licamele is the Editor of MortgageAlmanac.com and President of Residential Finance Network at rfnc.com.


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