One aspect of real estate fees that can be a bit convoluted is the closing costs of investing.
The reason for this is that there are so many different types of closing costs of investing, and they all come under one list from the mortgage lender. Before a real estate investor pays one penny, he/she needs to know exactly what he/she is paying for closing costs of investing and why. There are five types of closing costs of investing:
- Title Fees/Attorney Fees
- Pre-Paid and Escrow Account Fees
- Mortgage Insurance
- Loan Related Fees/Mortgage Lender Fees
- Investment Property Related Fees
Each of these closing costs of investing has different real estate fees included. As we explain each one, keep in mind that closing costs of investing differ from state to state as well as by the type of loan.
Related: Investing in Real Estate: What are Closing Costs?
Closing Costs of Investing: Title Fees/Attorney Fees
These closing costs of investing are really important for the real estate investor as well as the mortgage lender. Sometimes a real estate investor sells an investment property that has liens on the property or other issues, like with contractors. The title fees that a real estate investor pays ensure that the buyer is only getting the title of the investment property and not any liabilities that come along with it. These closing costs of investing protect mortgage lenders in a similar way.
These closing costs of investing include the real estate fees of title search and title insurance. Because you have to officially register your ownership of the investment property at a courthouse, there is a real estate fee for that as well. Recording real estate ownership requires a notary to witness that the real estate investor signs all of the proper investment property documents and the real estate investor pays house closing costs for this too.
The last thing to be included along with these closing costs of investing is attorney or settlement company fees. Occasionally, a real estate investor hires an attorney or settlement company to help with closing on an investment property purchase.
Closing Costs of Investing: Pre-Paid and Escrow Account Fees
House closing costs for this type of real estate fee mainly includes investment property taxes and home insurance. These two fees are listed in closing costs of investing in two ways: pre-paid or escrow account.
Pre-Paid Closing Costs of Investing
When the mortgage lender closes on a loan, the real estate investor has a full month before having to pay the first monthly mortgage payment. However, in this time the seller of the investment property is no longer responsible for paying property taxes or home insurance. To make sure there are no future issues with this, pre-paid closing costs of investing exist. A real estate investor pays what are called property tax prorations and a homeowners insurance premium. Because these house closing costs are paid before the first mortgage payment, they are called pre-paids.
House Closing Costs for Escrow Account
Some real estate investors find it much easier to pay their monthly mortgage payment, investment property taxes, and homeowners insurance all at once. This is possible by having an escrow account with your mortgage lender. Basically, the extra sum you pay on top of your monthly mortgage payment is put into what is known as an escrow account. Your mortgage lender keeps the money in the escrow account until it is time for the payments.
If you wish to have your mortgage lender make these payments for you with an escrow account, then you’ll be required to pay a certain amount in the form of closing costs of investing. This is to ensure that an amount is available in the escrow account for any bills that need to be paid right after closing the loan, before the first mortgage payment.
Mortgage Insurance Closing Costs of Investing
Mortgage insurance closing costs of investing depend on two things: down payment and mortgage type. Down payments on a mortgage are typically 20-30%. If a mortgage lender agrees to accept a smaller amount from a real estate investor, he/she is taking on a higher risk. That is why, in this case, you will have to pay mortgage insurance closing costs of investing.
Government loans usually require that a real estate investor pays mortgage insurance closing costs upfront. These kinds of mortgage loans also require a funding or guarantee fee as well.
In order to qualify for a mortgage in these situations, you have to pay mortgage insurance closing costs. Otherwise, the mortgage lender won’t approve you or take on the risk. These house closing costs are sometimes added to the monthly mortgage payment, making it more expensive. They can be part of the closing costs of investing alone or part of both the house closing costs and the monthly mortgage payment.
Related: What are Your Options for Financing Rental Properties?
Mortgage-Related Fees/Mortgage Lender Related Fees
One of the real estate fees categorized under this type of closing costs of investing is origination fees. When the mortgage is first created for an investment property, the mortgage lender puts forth these house closing costs. Other house closing costs in this list include application fees, a processing fee, and a credit report fee.
Do you want to save on interest rates? If so, consider mortgage points as part of your house closing costs. Mortgage points are closing costs of investing that a real estate investor pays directly to the mortgage lender. In return, he/she benefits from lowered interest rates. Really, what you’re doing is paying for interest rates upfront through mortgage points, rather than with your mortgage payments. Your decision to pay mortgage points depends on how long you will hold the investment property and if you have the money to pay for mortgage points upon closing.
Certain closing costs of investing can be listed under this type of house closing costs or the next one. It depends on your mortgage lender. These include underwriting fees, wire transfer fees, termite home inspection fees, and appraisal fees.
Related: How to Save Money: Negotiating and Reducing Real Estate Closing Costs
Investment Property Related Closing Costs of Investing
The final type of house closing costs is directly related to the investment property. As mentioned, mortgage lenders sometimes group this entire category with mortgage-related fees.
In order to approve a mortgage or determine how much the mortgage should be, mortgage lenders get an appraisal to find out the value of the investment property. They also get a home inspection for infestation, electrical, structural, and plumbing issues. Mortgage lenders also have a survey done if the investment property borders are unclear. FEMA and mortgage lenders require a test of the investment property to see if it needs flood insurance. The mortgage lender includes all of these in closing costs of investing. You will pay some of them as closing costs of investing and others when the action occurs.
Are there any other closing costs of investing on the loan estimate or disclosure statement you received from your mortgage lender? This is because there are random real estate fees like home warranty or courier fees that are placed into the categories for closing costs of investing mentioned here. Your mortgage lender will list them clearly, but you can always ask him/her to explain.
A real estate investor pays many different fees during the process of investing in a real estate property. Because of this fact, you need to make sure you understand exactly what you’re paying, especially when it comes to closing costs of investing.
If you want to know how house closing costs will affect your overall real estate investment, use Mashvisor’s investment property calculator. It allows you to enter in the closing costs of investing along with the rest of your real estate fees.
Click here to stay organized and keep track of all of your real estate fees.
Related: Real Estate Investors Want to Know: How Much are Closing Costs?