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.
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.