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Closing

Section 5 - Chapter 18 (continuation)

There are other items on a closing statement that are not exactly fees or charges. These include prorations of taxes and other recurring costs, as well as prepaid escrow monies. Though these are not strictly speaking closing "costs," they still have to be paid by you. There are some ways to reduce these if you are short on cash.

Property Tax Proration

Property taxes may have been paid for a year in advance, so if you are closing on June 30th, for example, you will owe the seller for half of the years taxes. If they are paid "in arrears," meaning you'll have to pay at the end of the year for the year gone by, then the seller will owe you for the half-year that he owned the property. Often it is more complicated than this, because part of the tax bill is paid in arrears and part for the coming year.

In any case, taxes are always prorated to the day of closing, with each party paying for the time that he will own the property. In other words, there may be a charge on the closing statement for this. The only thing you can do to keep this cost down s to be sure it is figured accurately.

Actually, there is one more thing you can do. The proration for taxes paid in arrears is based on the expected tax bill, and if it comes in significantly different than projected (the closing statement usually states a percentage difference) then one party can demand payment from the other.

An example: You buy on November 1, and the seller pays for the 303 days he owned the property. If the taxes are projected to be $1,200, or $3.29 per day, you get a credit for about $996 for the time the seller owned the home. If, however, the taxes go up, and the bill at the end of the year is $1,700, or $4.66 per day, the seller should have paid $1,411 for the 303 days of the year he owned the property. In this case, you can normally ask for the additional $415 he owes you.

This doesn't happen often. Usually the difference isn't worth pursuing. Keep that paperwork just in case, though, and watch for any unexpected jump in that first property tax bill.

Other Prorations

If the home you are buying is currently rented, and will be for a time after you close on it, you will be due some of the rent money. For example, if the renters pay $1,100 per month in advance, and you close on the 15th of April, you will be the owner for the second half of the month, so you will be credited with half of that $1,000, or $550.

Suppose there are renters at the moment, and you need some help with closing costs. Why not see if you can schedule the closing on or near the first of the month? That way, you'll get almost all of that rent credited to you at closing.

If you are buying a condominium, there may be a proration for the monthly condo association dues. If they are paid in advance, you will owe for whatever days remain in the month.

Other proration charges may be on the closing statement if there are any other recurring charges that the seller and you both have to pay. These can include special tax assessments that are being paid over a number of years, home owners association dues, and even service contracts for such things as lawn care, if you are continuing with the service.

Prepaid Escrow Charges

If you borrow more than 80% of the value of the home, the lender will likely require that you pay into an escrow account for property taxes and hazard insurance. These are not additional charges, but things you have to pay in any case. The lender just wants control, so they are sure these bills get paid.

You will be paying into this escrow account monthly along with your loan payment, at least until you have more than 80% equity and request that this escrow requirement be dropped. The lender may also require that you put as much as six months worth of payments into this account to start with, so this can be a large charge on the closing statement.

If you would rather save and budget for property taxes and insurance on your own, ask how you can have this requirement waived. Most likely, the only way will be to raise your down payment. In any case, ask, so you know what your options are. On the other hand, most people probably like having this as pat of their payment, rather than having to come up with a big chunk of money every year for taxes.

Prepaid Interest

You owe interest on your loan from the day you borrow the money. However, since you rarely close on exactly the first of the month, you will owe interest for part of a month. In order to keep payments uniform, here is the usual custom: Your first payment will be on the first of the month after the next one. In the meantime, you pay interest for the rest of the current month (the one in which you close), and you pay it in advance, at closing.

Suppose, for example, you borrow 120,000 at 6% annual interest, and you close on May 13. Your first payment will be on July 1, and will cover interest for June, with the remainder going to principle. In the meantime, you pay the interest for May at closing. In this case, that would be for 18 days at 6% annual, or a total of $355.14 ($19.73 per day times 18 days)

If you want to keep your cash needs at closing to a minimum, you can try to arrange a closing near the end of a month. If you closed on May 28, in the above example, there would only be a charge for $59.19 for prepaid interest ($19.73 per day times three days).

Prepaid Mortgage Insurance

This too, will be paid in advance for the balance of the days left in the closing month. It may be included in the prepaid interest category, or listed as a separate charge.

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