CLOSING COST ITEMIZATION: CASE ILLUSTRATION

Selling terms and closing costs
Prorations
and charges

The Closing Disclosure summarizes the financial settlement of a transaction. At closing, the closing agent also generally provides a statement to the buyer and/or seller detailing receipts and disbursements from relevant escrow accounts to which the buyer and seller have contributed funds as part of the transaction. The following illustration shows how some of these cost components are calculated and allocated in a sample transaction.

Selling terms and closing costs              

Lawrence and Sandy Binder have accepted an offer on their house located at 928 Elm Street, Littleburg. The buyers, Bill and Dillis Waite, offered $450,000, with earnest money of $70,000 and the remaining $380,000 of the purchase price to come from a new conventional loan from Scepter Mortgage Company. The loan is for 30 years at 5.5% interest, with a monthly principal plus interest payment of $2,158. The lender is charging 1.5 points and a 1% origination fee. Closing is set to occur at Alta Title Company at 4 p.m. on May 10 of the current (non-leap) year.

The Binders have an agreement to pay a broker’s commission of 6% to Littleburg Realty. Their unpaid mortgage loan balance as of May 1 will be $184,000. Their monthly interest payments are $613.00. The annual interest rate is 4%. The previous year’s county taxes, amounting to $2,572, have been paid by the seller in arrears. The current year’s taxes, not yet billed or paid, are assumed to be the same as the previous year’s. The parties agree to prorate using the 365-day method, and that the day of closing belongs to the seller. The relevant facts and costs, and who pays them according to the terms of the sale contract, are summarized below.

Selling terms

Sale price:                                             $450,000

Deposit/downpayment                       $70,000

Loan amount                                       $380,000

Seller-paid Costs

Commissions:                                      6% of sale price (.06)

Real estate taxes:                                $2,572, to be prorated

Title insurance:                                   $900 owner’s coverage

Seller’s attorney:                                 $1,500

Record Release Deed:                        $25

Survey:                                                  $550

Transfer stamps

state:                      $162

county:                  $162

Seller’s loan payoff:                          $184,000 + 10 days’ prorated May interest @ $613/month

Buyer- paid Costs

Sale price:                                            $450,000 ($70,000 earnest money already deposited by buyer)

Appraisal fee:                                      $400 already paid by buyer

Credit report:                                       $50 already paid by buyer

Closing fee:                                          $350

Recording fees:                                   $55

Title insurance:                                   $250 for lender’s coverage

Buyer’s attorney:                                 $1200

Pest inspection:                                    $100

Buyer’s loan:                                        $380,000; 30-year fixed @ 5.5% (.055)

                                                                points: 1.5% of loan amount (.015)

                                                                origination fee: 1.0% of loan amount (.01)

Hazard insurance:                               $2,400/year

Real estate taxes:                               $2,572.00, to be prorated

Tax and insurance escrow:               8 months’ taxes, 4 months’ insurance

Prepaid interest:                                   from day after closing to end of month

Prorations and charges                

According to the summarized sale contract, the only cost to be prorated and shared between seller and buyer is the real estate tax. Other costs to be computed are the broker’s commission, the seller’s unpaid mortgage interest, the buyer’s loan fees and points, the buyer’s tax and insurance escrows, and the buyer’s prepaid mortgage interest.

Commission. The commission paid by the seller is:

$450,000 x 6%            =           $27,000.00

At closing this amount will be charged, or debited, to the seller.

Real estate taxes. Using the 365-day method, the daily amount is $2,572 ÷ 365, or $7.05 (rounded).  The total number of days is the number of days in January, February, March and April, plus 10 days in May, or (31+28+31+30+10), or 130 days.  At closing, the seller’s share of $916.50 is charged to the seller and the buyer is credited with the same amount.

Total amount due: =$2,572.00
     
Daily amount: Seller’s share2,572 ÷ 365 7.051 x 130  = =  $ $  7.05 916.50  
Buyer’s share:2,572 – 560.30=$1,655.50

Seller’s unpaid mortgage interest. Since mortgage interest is paid in arrears, the seller owes the lender for interest not yet charged for the ten days of the month of closing. This amount is therefore debited to the seller.

Daily amount:613 ÷ 31 days=$19.77
Seller’s charge:                    19.77 x 10 days=$197.70

Buyer’s loan origination and points. The buyer’s debits for loan fees and points are:

Fee:380,000 x 1%=$3,800
Points:380,000 x 1.5%=$5,700

Buyer’s escrow. The lender requires the buyer to establish an escrow account to cover eight months of real estate taxes and four months of hazard insurance. The debits charged to the buyer are therefore:

Taxes:    
     
Annual amount: =$2,572.00
Monthly amount:2,572 ÷ 12=$214.33
Amount due:214.33 x 8 mo.=$1,714.64
     
Insurance:    
     
Annual amount: =$2400.00
Monthly amount:2400 ÷ 12=$200.00
Amount due:200 x 4 mo.=$800.00

Prepaid interest. The lender requires the buyer (borrower) to pay, in advance, the interest on the loan amount disbursed at closing to cover the 21 days of the closing month that would be due in arrears later. Note that the lender is not charging the borrower for interest for the day of closing. The buyer’s first mortgage payment, which will cover the month of June, will not be due until July 1. Charged to buyer:

Monthly amount:380K x 5.5% ÷ 12=$1741.67
Daily amount:1,741.67 ÷ 31=$56.18
Total prepaid interest56.18 x 21 days=$1179.78