you shouldn’t ignore them when you figure the amount of money you need to close the deal. Having enough to pay the down payment on your loan just isn’t sufficient.
Here are the major closing costs and our guidance as to how much to budget for each:
❯❯ Loan-origination fees and charges: Lenders generally levy fees for appraising the property, obtaining a copy of your credit report, preparing your loan documents, and processing your loan. They’ll also whack you 1 to 2 percent of the loan amount for a loan-origination fee. Another term for this prepaid interest charge, as we explain in Chapter 9, is points. If you’re strapped for cash, you can get a loan that has few or no fees; however, such loans have higher interest rates over their lifetimes. You may be able to negotiate having the seller pay these loan-closing costs. The total loan-origination fees and other charges may add up to as much as 3 percent of the mortgage amount.
❯❯ Escrow fees: These costs cover the preparation and transmission of all home-purchase-related documents and funds. Escrow fees range from several hundred to over a thousand dollars, based on the purchase price of your home.
❯❯ Homeowners insurance: Lenders generally require that you pay the first year’s premium on your homeowners insurance policy at the time of closing. Such insurance typically costs from several hundred to several thousand dollars, depending on the value of your home and the extent of coverage you desire.
❯❯ Title insurance: Title insurance protects you and the lender against the risk that the person selling you the home doesn’t legally own it. This insurance typically costs from several hundred to a few thousand dollars, depending on your home’s purchase price. Happily, the premium you pay at close of escrow is the only title insurance premium you’ll ever have to pay unless you subsequently decide to refinance your mortgage. Oddly, there are places like Northern California where the seller (not the buyer) pays for the “main” title policy. This is purely a matter of “local custom.” Ask your agent what the custom is where you are buying.
❯❯ Property taxes: At the closing of your home purchase, you may have to reimburse the sellers for property taxes that they paid in advance. Here’s how it works. Suppose you close on your home purchase on October 15, and the sellers have already paid their property taxes through December 31. You have to reimburse the sellers for property taxes they paid from October 15 through the end of the year. The prorated property taxes you end up paying in your actual transaction are based on the home’s taxes and the date that escrow actually closes and cost from several hundred to a couple of thousand dollars. In some parts of the country, if you paid more than the prior owner for the property, you may also receive a supplemental property tax bill from your tax collector, after you close escrow, seeking payment for the incremental increase in the property taxes for your prorated period of ownership.
❯❯ Attorney fees: In some eastern states, lawyers are involved (unfortunately from some participants’ perspectives) in real estate purchases. In most states, however, lawyers aren’t needed for home purchases as long as the real estate agents use standard, fill-in-the-blank contracts. If you do hire an attorney, expect to pay at least several hundred dollars.
❯❯ Property inspections: As advocated in Home Buying For Dummies (Wiley), you should always have a home professionally inspected before you buy it. Inspection fees usually cost at least several hundred dollars (larger homes cost more to inspect of course). Be sure to carefully review this report and ask for additional information or hire a specialized contractor to conduct further investigation for any noted item of concern. If you are able, accompany the inspector when he inspects the property.
❯❯ Private mortgage insurance (PMI): If you make a down payment of less than 20 percent of the purchase price of the home, mortgage lenders generally require that you take out private mortgage insurance that protects the lender in case you default on your mortgage. You may need to pay up to a year’s worth of premium for this coverage at closing, which can amount to as much as several hundred dollars. One terrific way to avoid this extra cost is to make a 20 percent down payment.
❯❯ Prepaid loan interest: At closing, the lender charges interest on your mortgage to cover the interest that accrues from the date your loan is funded – generally one business day before the closing – up to the day of your first scheduled loan payment. How much interest you actually have to pay depends on the timing of your first loan payment.
If you’re strapped for cash at closing, try the following tricks to minimize the prepaid loan interest you owe at closing:
● First, ask your lender which day of the month your payment will be due and schedule to close on the loan as few days in advance of that day as possible. (Payments are usually due on the first of the month, so closing on the last day of the month or a few days before is generally best.)
● Or ask whether your lender is willing to adjust your monthly due date closer to the date you desire to close on your loan.
● Also, never schedule a closing to occur on a Monday because the lender will generally have to put your mortgage funds into escrow the preceding Friday, causing you to pay interest for Friday, Saturday, and Sunday. (Some lenders may be able to accommodate a Monday closing by same-day wiring the funds for an afternoon closing.)
❯❯ Other fees: Recording fees (to record the deed and mortgage), courier and express mailing fees, notary fees – you name it. These extra expenses usually total about $200 to $300. Note: Ask your mortgage lender for a complete listing of all fees and charges.
In addition to costing you a monthly mortgage payment, homes also need flooring, window treatments, painting, plumbing, electrical and roof repairs, and other types of maintenance over time. Of course, some homeowners defer maintenance and even put their houses on the market for sale with lots of deferred maintenance (which, of course, will be reflected in a reduced sales price that is often much greater than the cost to have made those simple repairs).
For budgeting purposes, we suggest that you allocate about 1 percent of the purchase price of your home each year for normal maintenance expenses. So, for example, if you spend $240,000 on a home, you should budget about $2,400 per year (or about $200 per month) for maintenance.
With some types of housing, such as condominiums or planned unit developments (PUD), you pay monthly dues into a common interest development (often referred to as a homeowners association), which takes care of the maintenance for the community. In that case, you’re responsible for maintaining only the interior of your unit. Check with the association to see how much the dues are currently running, anticipated future monthly or quarterly dues increases or special assessments, what services are included, and how they’ve changed over the years.
In addition to necessary maintenance and furnishings, also be aware of how much you may spend on nonessential home improvements, such as adding a deck, remodeling your kitchen, and so on. Budget for these nonessentials unless you’re the rare person who is a super saver, can easily accomplish your savings goals, and have lots of slack in your budget.
The amount you expect to spend on improvements is just an estimate. It depends on how finished a home you buy and your personal tastes and desires. Consider your previous spending behavior and the types of projects you expect to do as you examine potential homes for purchase.
Consider the Impact of a New House on Your Financial Future
As you collect your spending data, think about how your proposed home purchase will affect and change your spending habits and ability to save. For example, as a homeowner, if you live