Out-of-Pocket Costs When Buying a Home
Purchasing a home is an exciting time, and the anticipation of moving into a new place is often tangible.
However, buying involves more than just finding your dream home; it also requires being prepared for the out-of-pocket expenses associated with it. The costs and fees can be numerous, making it crucial to understand what you have to pay before entering into a sales contract. Review this guide to familiarize yourself with some of the most common add-ons you may come across during the homebuying process.
Mortgage
Lenders charge a variety of fees to secure a loan; which ones apply to you will depend on variables such as the amount of your down payment and your loan program.
Appraisal
Your lender will require a licensed property appraiser to verify your home’s value; the cost of which is then passed on to you.
Discount point
Many lenders provide programs that allow you to reduce your mortgage interest rate by prepaying for discount points—the cost of each point is equivalent to 1 percent of the loan amount.
Origination fees
These charges are imposed by your lender to cover the expenses associated with handling your loan. On your closing statement, you’ll often see itemized fees such as the application and underwriting fees, while the origination fee encompasses the costs associated with handling your loan.
Private mortgage insurance (PMI)
If your down payment is less than 20 percent, your lender will likely require you to purchase PMI.
Although this is a monthly charge rolled into your mortgage payment, sometimes there’s an up-front, one-time premium charged at closing.
Rate lock
Depending on your loan terms, you may have the option to lock in your interest rate for a set duration, typically thirty to sixty days. The fee for a rate lock ranges from 0.25 percent to 0.50 percent of your loan amount.
Survey
To ensure there are no encroachments or easements affecting the use of your property, your lender will require a survey to verify the property’s boundary lines.
Title insurance
Lenders require a title search to be conducted on the property. Once it’s been verified that there are no liens or other conflicts, you’ll need to purchase title insurance. There are two primary categories of policies: lender’s title insurance and owner’s title insurance.
Lender’s title insurance
Borrowers must purchase this policy so the lender is guarded against future legal claims such as unpaid taxes or contractor liens. These fees are government mandated and generally range from 0.5 percent to 1 percent of the home’s purchase price.
Owner’s title insurance
Buyers often seek extra protection by getting an owner’s title policy to shield themselves from any claims that may arise after the purchase. The fee can range from just a few hundred dollars to several hundred dollars; nevertheless, it can be well worth the investment.
Tax liability
Another financial consideration to be ready for is your tax responsibilities, which are typically determined by the tax cycle. For instance, closing later in the month can lead to lower closing costs—your initial taxes will be prorated from the closing date to the month’s end—resulting in a shorter period for interest and taxes to accumulate.
Escrow payments
It is customary for the loan servicer to escrow at least two months’ worth of taxes to be held in an escrow account to ensure your taxes are paid on time and in full.
Tax proration or prepaid items
If the seller has already settled their annual taxes, you’ll need to reimburse them for the unused portion. Conversely, if the seller has outstanding tax dues, they are responsible for settling the portion that is unpaid up until the closing day.
Tax service fee
When your lender compiles the closing statement, a fee will be assessed to verify the tax information to ensure its accuracy.
Miscellaneous costs
In addition to the mortgage fees and taxes, you can expect to pay the following out-of-pocket expenses when purchasing a home.
Attorney fees
If you decide or are required to hire an attorney for representation, their fees will likely be added to your closing costs.
Courier services
A third-party service may be needed to deliver documents between you and the seller during the closing process.
Documentation costs
There are additional charges the title company will impose at closing. These include fees for notarizing and recording the transaction, and preparing the deed, along with endorsement and settlement fees.
Homeowners association (HOA) membership
If you are purchasing a home in a community with an HOA, you’ll be expected to pay an application and initiation fee.
Homeowners insurance policy
Lenders typically require you to pay one year of homeowners insurance at closing. This money is held in an escrow account to ensure the policy is paid and your home is protected from fire, theft, and other damages.
Inspections and certifications
You can expect to pay up front for a home and pest inspection—these inspections are crucial and should not be sidestepped. Depending on the condition and age of the home, additional inspections and certifications may be needed, such as for electric systems, engineering, mold, and lead.
Prepaid interest
Based on the timing of your closing, you may be required to cover any accrued interest on your mortgage between the date you close and your first mortgage payment.
Special insurances
If your home is in a flood or earthquake zone, you may have to purchase additional insurance to protect it against these natural disasters.
Wire transfer fee
The bank charges a fee for wiring money from your bank account to the escrow agent.
Postclosing
Finally, don’t forget to allocate funds to set up your new home’s security system, cable and internet service, and utility hookups such as electric, gas, water, and sewer. And while you likely have planned for repairs or renovations, it’s important to remain mindful that unforeseen issues can still crop up after you close. Even with the most comprehensive preclosing inspection, problems such as a malfunctioning thermostat, furnace, HVAC system, or broken appliance can lead to unanticipated expenses.
To prevent any surprises during the homebuying process, verify with your lender and real estate agent that you have covered all anticipated costs. This can help ensure a smoother and more transparent transaction.