In all of the excitement of buying or selling a home, closing costs are an important consideration that can often get overlooked. While buyers are usually aware that there are going to be additional costs associated with the purchase of a home for things like the home inspection, they tend to be less aware of just how much closing costs in colorado are going to be.
Closing costs and prepaids in the State of Colorado are additional fees associated with your mortgage loan and real estate transaction. Colorado buyers should look to your REALTOR® and Mortgage Lender to explain and review these fees as you start the home buying process and then clarify actual amounts as you get closer to the closing table.
Below is a brief description of the various Colorado closing costs that are commonly paid by both the buyer and the seller. It should be noted that the seller or lender can also participate in paying some or all of the buyers costs.
Loan Origination Fees
When we look at the average closing costs you might expect to pay in Colorado, the loan origination fee is one of the most common charges we see. The loan origination fee is a lender fee that covers the costs of processing the mortgage loan. This fee is what pays for the lender's service and the work associated with moving the loan through to closing. This includes tasks like pulling and analyzing credit reports to establish your credit score, gathering documentation, and all of the legwork associated with satisfying the conditions made by the underwriting department.
Loan origination is generally expressed as a percentage of the loan amount (i.e. 0.5% to 1% of the loan amount). Loan origination fees can also be bundled into one fee, or listed individually as different names like application fee, processing fee, or underwriting fees.
Some lenders may advertise that they have no origination fees but at least in Colorado, those lenders tend to get their money somewhere else like interest rate, this is why it is so important to get a loan estimate from each lender you are talking with. The loan estimate will allow you to check the annual percentage rate or APR. You should check to see if the origination fee is included in the APR.
While origination fees will add to the cost of your loan this shouldn’t be a deal breaker. Paying the origination fee up front can help lower your monthly payment
Loan Discount Points
Points are a one-time charge by the lender that adjusts the yield on the loan to market conditions. Each point equals 1% of the mortgage amount. You can think of points as prepaying your interest up front in order to lower the interest rate over the life of the loan.
This may be a good idea, especially if you plan to be in the home for a long time. The important thing to keep in mind are the savings you’ll receive over time versus the cost of the points. Here is a good example of how points work.
You are taking out a 30-year fixed home loan for $300,000. The mortgage company offers you a rate of 3.00% with no points paid or 2.75% with one point paid. The 3.00% loan would result in a $1,264 payment while the 2.75% loan payment would be $1,224. This means a $40 savings every month.
When you look at the big picture, paying that 1 point or $3,000 to save $40 a month would take 75 months, or just over 6 years, to realize any benefit. If you are planning on staying in the property for a long time, paying points might make sense.
The mortgage lender will require an appraisal to determine whether the value of the property is sufficient to secure the loan should you default on the loan. The lender orders the appraisal and the buyer pays this fee upfront.
Nationally, appraisals average about $400, while in Colorado we are seeing appraisal costs range from $500 to $1,200. Factors that impact the cost of an appraisal include:
- Square footage or size of the home
- The type or style of home
- Location of the property
- Property condition
- Access to the property
An appraisal is like any other service. The more work required, the more expensive the appraisal. If the home is large, remote, and unique it is going to require more work than the average home located in a subdivision. Therefore you’ll pay more for the appraisal.
Credit Report Fee
The lender will order your credit report, this is used to determine your credit-worthiness. Like the appraisal fee, this fee will sometimes be collected up front, other times it will be collected at closing. Credit report fees can range from $30 to $50 per report, this is a fee that many lenders will pay for themselves.
Interest Included in Colorado Closing Costs
You will probably have to make the interest payment on the mortgage from the date of settlement to the beginning of the following month. For example, if you settle on February 10th, your first monthly payment begins to accrue on March 1st and will be payable at the beginning of April. At closing, you will be required to prepay the interest for the period from February 10th through the end of the month. This means that if your closing date is later in the month, your closing costs will be less than if you close earlier in the month.
Mortgage Insurance Premium and Private Mortgage Insurance (MIP and PMI)
There are a variety of ways to pay mortgage insurance. It can be paid upfront or monthly, or as in the case of FHA loans can be rolled into the loan. Your Loan Officer can explain your options in detail.
Hazard Insurance Premium (Homeowner’s Insurance Policy)
If you have a mortgage, the lender is going to require you to carry a property insurance policy. If you have less than 20% equity in the property, the lender will make these payments for you. You will be required to the first year’s premium at closing.
Escrow Accounts or Reserves
The lender will most likely end up paying your remaining insurance premiums as well as your Colorado property taxes. In order to make these payments, they’ll need to set up an escrow account from which they pay both taxes and insurance. This account will hold 2 to 3 months of reserve funds for the lender to use in order to pay your real estate taxes, mortgage insurance, and hazard insurance.
Title fees and associated charges are payable to the title company or persons other than the lender. This includes the settlement (or closing) fee, title search, title insurance fees (lender’s and owner’s coverage), and attorney fees (for legal services provided to the lender). These are typical closing costs and any additional fees you pay for your own attorney are not part of the settlement procedures.
Recording and Transfer Fees
Most states impose a tax on the transfer of property and require a payment of a fee for recording the purchase documents. This is sometimes referred to as a deed transfer tax, and is a one-time fee imposed by state or local governments.
Transfer taxes are generally paid by the home seller upon the transfer of real property. The cost of this fee is usually based on the purchase price of the home.
Colorado passed a constitutional amendment in 1992 freezing all real estate transfer taxes and prohibiting any new transfer taxes from being imposed. In 2018 lawmakers passed a state “Documentary Fee” of 0.01% on any sale over $500. These Colorado closing costs are often referred to as a transfer tax in disguise.
If the property is in a community that has a “Home Owners Association”, there may be additional fees related to the transfer of property ownership. Any current Association assessments and dues (Association Assessments) that were paid in advance by the home seller, will be credited to Seller at Closing.
Any cash reserves held out of the regular Association Assessments for deferred maintenance by the Association will not be credited back to Seller except as may be otherwise provided by the Governing Documents. The buyer may be obligated to pay the Association, at Closing, an amount for reserves or working capital.
These various fees can include but are not limited to: ILC (Improvement Location Certificate), which may be required for any purchaser obtaining a new loan, and any other inspections or requirements from the lender.
Another part of the settlement statement involves looking at items paid by the seller in advance and items yet to be paid for which the seller is responsible. The most common expense to be prorated between the Buyer and Seller is Colorado property taxes.
In calculating the total amount that the borrower must pay in Colorado closing costs, the Settlement Statement begins with the sales price and adds in the total closing costs for which you are responsible. Any pro-rated adjustments payable by you (as discussed above) are then calculated in. From this total, your deposit is deducted (which has been held in escrow since the seller signed your purchase offer) as well as the principal amount of your mortgage. Then, any adjustments payable by the seller are deducted. The resulting figure is the amount you must pay at settlement.
The complexity of the mortgage world has increased dramatically over the last few years. The pricing differences can be dramatically different based on not only credit but the down payment and the property itself. It is advisable that you consult with an experienced, professional mortgage banker. When it comes to choosing a lender, ask for referrals, especially from your REALTOR®.