Don’t Get Blindsided When Buying a Home
The cost of a home is not limited to the purchase offer that is accepted by seller – thus, it is important to remember the closing costs and fees to budget for along the way.
Purchasing a home for the first time can be an exciting and daunting proposition – especially in this competitive market. Demand is high, inventory is low and buyers are willing to stretch quite a bit on purchase price in order to achieve the esteemed title of “home owner”. With that said, the cost of a home is not limited to the purchase offer that is accepted by seller – thus, it is important to remember the closing costs and fees to budget for along the way.
Before you start hyperventilating, this isn’t a laundry list of fees as you’ll see in a minute. Closing costs are those relating to originating the loan, paying the title company and closing the mortgage.
Lender Fees:
- Loan origination fee (typically between .5% and 1% of total loan balance)
- Loan application fee (typically a few hundred dollars)
- Discount Points (you can pay 1% of loan balance to reduce rate by 25 basis points)
Third Party Fees:
- Mortgage Insurance (to compensate lender if borrower defaults – cost varies)
- Credit Report fee (minimal fee of ~$25 to provide lender with borrower’s credit)
- Home Appraisal (depends on the appraiser, but typically a few hundred dollars)
- Title Search (to ensure clean title on the property – typically a couple hundred dollars)
It’s worth noting that sometimes the seller may cover the above closing costs, but the buyer will always be responsible for prepaid expenses, which include:
- Prepaid interest: typically paid for remaining days in first month’s billing – which is why it’s advantageous to close later in the month – less days of interest accrual for you to pay).
- Prepaid property taxes
- Homeowners insurance and escrow deposits.
- Home Owners Association (HOA) Payments: If you live in a condo or housing community with an HOA – these fees may also be included in the list of prepaid items.
NOTE: These items are often paid on an annual basis, but they’re held in escrow (essentially a temporary bank account) until it’s time for them to be paid. The lender may maintain this escrow account in order to reduce the risk of non-payment of taxes. It’s in the owner’s and lender’s best interest to stay current on all tax payments so as to avoid losing your home to a tax sale.
Once you have all your ducks in a row, you’ll end up paying these closing costs and whatever the balance of your down payment (remaining amount due after your earnest money deposit) on the day you sign your final loan documents.
This is just an overview so that you’re not blind sided by additional costs/fees. As you dive into the home buying (or refinancing) process, any good agent and lender should be able to walk you through each step of the way. Good luck!