Closing costs are the expenses associated with processing the loan and all the components needed to close on the property. One of the largest expenses is the VT Transfer tax charged by the state at the time of closing. This is charged to the buyer. If the buyer is purchasing the property as a primary residence, the rate is tiered at .5% for the first $100K. Anything over $100K is charged at a rate of 1.45%. Second homes, vacation properties or properties not purchased as a primary home will be charged 1.45% on the entire purchase. Buyers using VHFA will receive a discount on the transfer tax.
The mortgage company will charge a fee for processing a loan, often called an origination fee. The cost will vary from lender to lender. It’s best to ask what the fee is when speaking with a mortgage professional. The mortgage company may charge points as well. Points are often associated when purchasing an investment property or if the buyer’s credit score is low.
In Vermont, attorneys are utilized to close the property. The attorney will perform a title search and render a title opinion to you and the mortgage company indicating if there is an issue or clean title. The attorney charges a fee for services rendered. The attorney also provides title insurance as part of the closing. Title insurance is a policy meant to protect the buyer and mortgage company from damages or financial losses caused by bad title due to title defects.
Title insurance is required by the mortgage company and optional for the buyer to purchase. It is good idea to purchase the policy for yourself. It’s a one-time fee due at the time of closing.
Another cost for closing is creating an escrow account for property taxes and property insurance. Mortgage companies want assurances the property taxes and insurance will be paid. To make sure that occurs, the mortgage company will collect enough funds at the closing to establish an account. When the payments come due, they will pay them automatically. Your monthly mortgage payment includes principle, interest, taxes, and insurance (PITI). How much is collected at the closing depends on how many times a year taxes are due from the town. This will impact your closing costs. Some mortgage companies do not require this for closing.
Other expenses include a fee to create the escrow account. There is a recording fee to record the mortgage and deed into the land records of the town you are purchasing in. Appraisal fee can be a part of the closing costs. If there are points being purchased on the loan, that will be assessed at the closing. Since mortgage payments are paid in arears, there will be interest accruing on the property from the time of closing until the first mortgage payment is due. The interest accrued needs to be paid at the time of closing to keep the account current.
The other expenses involve prepaids. Prepaids are property taxes, dues, fuel, water bill, or prebate that have already been paid by the seller in advance of closing the property.