Question 1

How is title insurance calculated?

Accepted Answer

Title insurance premiums are set by state-filed rates and calculated as a percentage of the purchase price or loan amount. A typical owner's policy runs $3.50 to $5.50 per $1,000 of purchase price. A $400,000 home might have a title insurance premium of $1,400 to $2,200. Lender's title insurance is required by virtually all mortgage lenders and is separate from the owner's policy. In most states, premiums are regulated and do not vary between title companies.

Question 2

What are typical closing costs for a buyer?

Accepted Answer

Buyer closing costs in the US typically run 2 to 5% of the purchase price. On a $400,000 home that is $8,000 to $20,000. The largest components are lender origination fees, title insurance, escrow fees, prepaid interest, property tax impounds, homeowner's insurance prepayment, and recording fees. Cash buyers pay significantly less because they avoid all lender-related fees.

Question 3

How is the escrow impound account calculated?

Accepted Answer

Lenders calculate the initial escrow impound deposit to ensure enough funds are in the account to pay property taxes and insurance when they come due. The initial deposit typically covers 2 to 3 months of property taxes plus 2 months of homeowner's insurance. Monthly escrow payments going forward equal one-twelfth of the annual property tax and insurance bills. RESPA limits the cushion lenders can require to 2 months of escrow payments.

Question 4

How is property tax prorated at closing?

Accepted Answer

Property tax proration divides the annual tax bill by the number of days in the year and assigns the daily rate to the number of days each party owned the property during the tax period. If taxes are paid in arrears (as in most states), the seller credits the buyer for the days the seller owned the property. If taxes are paid in advance, the buyer credits the seller. The exact calculation depends on the local tax calendar and whether proration is done on a 365-day or 360-day basis.

Question 5

What is transfer tax and who pays it?

Accepted Answer

Transfer tax (also called deed tax, documentary stamp tax, or conveyance tax depending on the state) is charged when real property changes hands. Rates range from 0.01% in Colorado to over 2% in some municipalities. Who pays - buyer or seller - is typically negotiated in the purchase contract but varies by local custom. Some states like Texas and Montana have no transfer tax. Others like New York City layer city, county, and state transfer taxes that can exceed 2% of the sale price.

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