1. Pillar 3: Closing Costs
Besides good credit and good income, you have to have a significant amount of money saved to close.

2. Closing Costs - Overview
There are many, many expenses related to buying a home. These costs can be grouped into 3 main categories:
Down Payment
Non Recurring Closing Costs (or one time fees)
Recurring Costs (or pre-paids and escrows)
We will not get too specific as costs differ greatly from state to state, but we will discuss the major ones and why the bank requires them.

3. Down Payment Typically at least 5% of the purchase price.
PMI is required if less than 20% down payment.
Example - $200,000 Purchase
5% Down = $10,000 (PMI required at $100+ / month)
20% Down = $40,000 (no PMI)

4. Down Payment (Cont.) Why Required?
Buyer needs some “skin in it”. Put another way, the buyer must have something to lose. Creates incentives to:
Make all payments. Foreclosure costs a lot of money.
Maintain the property to protect/increase value.
Provides some protection to mortgage lender.
It is never good when a consumer has a loan on an asset that is more than the asset is worth. Called being “upside down”.
This was a huge part of the 2008 housing crisis.

5. Non-Recurring Closing Costs
These are costs that the buyer will only face once in the life of the loan.
There are lots of them!!! Typically adding 3-7% to the cost of the home.
Why required?
Most of these costs are required by the mortgage lender and the state/town .
Lender – wants to protect their investment (the loan!)
Town/State – wants to ensure proper tracking of real estate ownership.
Most of the expenses are required to make the bank feel comfortable lending you a large sum of money.

6. Non-Recurring Costs (Cont.)
The Big Ones & Why:
Appraisal
Assures the bank the home is worth what you are buying it for.
Attorney Fees
A lawyer must research the property and ensure the sellers have a right to sell it.
Title Insurance
Protects the bank and the buyer if someone claims the house should be theirs.
Flood Certification
Verification if the property is in a flood zone. If so, very expensive flood insurance must be purchased.
Recording Fees
Paperwork tracking the sale must be kept on record at the town office.
Transfer Tax
Many states charge a sales tax when a home is bought. In VT, a $200,000 home purchase generates a $1,750 tax.

7. Recurring Expenses (aka Pre-Paid Expenses)
Recurring costs generally continue each year as long as you own the home and/or have a mortgage.
Three main types:
Mortgage Interest – the buyer pays the first days of interest on the mortgage. Gives the bank time to set up servicing. No PITI payment is required during this time.
Real Estate Taxes – Often times, the seller has paid taxes for several months into the future. The buyer must reimburse the seller.
Insurance – Most banks require you to pre-pay 1 year of your homeowners insurance premium.

8. Escrows
Many banks require the borrower to escrow future real estate tax payments and homeowners insurance.
Escrow means they force the borrower to save so taxes and insurance can always be up to date.
Why Escrow Insurance?
The bank requires the house be insured so they do not lose their money if the house is damaged.
Why Escrow Real Estate Taxes?
Protects the banks position as first lien holder.
In the event of a sale, they get paid back first.

9. Closing Costs Example Situation: Buying a $200,000 house with 5% down.
Closing on June 15th
Taxes = $3,600 per year and are due March 15th and Sept. 15th.
Insurance is $1,200 per year.

10. Down Payment
10,000.00
Non-Recurring Closing Costs
Attorney Fees
600.00
Title Insurance
350.00
Appraisal
500.00
Flood Certification
35.00
Recording Fees
100.00
VT Transfer Tax
1,750.00
Pre-Paid Expenses
Mortgage Interest
416.44
Homeowners Insurance
1,200.00
Taxes Pre-Paid by Seller
150.00
Escrows
300.00
Real Estate Taxes
1,800.00
Total Due At Closing
17,201.44