Closing Costs and Hidden Cost
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Closing costs are the innumerable fees and taxes associated with purchasing and taking ownership of a home. They include searches, clearances, and reports to process the transaction. Depending on where you live and the complexity of your transaction, they can easily add up to thousands of dollars. They're generally around 3% to 6% of the purchase price of the home.
They really shouldn't be "hidden" -- your lender is required to give you a written, good-faith estimate of all your closing costs within three days of your applying for a loan. However, don't go into the process of buying a home without knowing about them. For help in finding a mortgage lender check out our Finance Your Home section.
Points or loan origination fees. This is an up-front payment of the interest that you owe your lender. The range that you'll have to fork over is anywhere from nothing to about 3% of the loan. Remember, the more points you pay, the lower your overall interest rate should be, and vice-versa. If you're strapped for cash, you can get a loan with no points, but you'll pay a higher amount over the life of your loan. Another option is to have the seller pay these costs for you. Ask your buyer broker about broaching the subject with the sellers.
Escrow fees. These are the fees that are charged to process all of the paperwork and keep the money in a safe place while you and the seller dicker over things. Depending on the cost of your home, this can amount to a few hundred to a couple of thousand dollars.
Homeowner's insurance. We discuss this in detail elsewhere. For now, though, know that you should expect to pay between $500-$2,000 depending on the value of your home and your coverage. You must get this insurance before your lender will release the funds for your house.
Title insurance. What would happen if, six months after you move into your new house, you discover that the person who sold you the house didn't really own it? Arrgh! While it's a remote possibility, it does occasionally happen. Luckily, there's protection against this very problem. Your lender will want you to get "title insurance" to take care of this situation should it arise. Based on the value of your home, expect to pay between $500-$2,000.
Property taxes. Depending on when your purchase actually closes, you may owe the previous owners for taxes that they've already paid. For example, say the old owners paid their taxes from January through June. You buy the house in April. Well, they've already paid for your taxes for May and June. You need to reimburse them for this expense. In addition you may need to prepay some taxes.
Legal fees. You may not need a lawyer. Ask your buyer broker if she feels that the transaction is complicated enough to hire one. Frequently, home transactions just use boilerplate forms for everything. If this is the case, you will save money.
Private mortgage insurance. If you have a loan that requires it, count on paying at least a few month's premiums in advance. Some lenders will want you to pay for an entire year. You can nix this if you can come up with a 20% down payment.
Notary. Yes, someone has to swear that you are who you say you are. Expect to pay about $50 for the privilege.
Document prep fees. Lender and/or broker fees.
Appraisal fees. To give your home a fair market value.
Factual credit report fee. A verified credit report.
Tax service fees. To ensure your taxes are paid each year.
Survey fee. This may be waived sometimes if an existing survey can be used.
Pest inspection fee. If your house is new, this can be waived.
State recording fees. As your state requires.
Irving. At every closing there's this guy named Irving. He always wants anywhere from $20 to a couple of thousand dollars for the trouble of showing up. Sometimes, he doesn't even show up. He just sends a letter saying. "Pay me now or you can't have your house!" Irving can represent the municipal tax office, which says you have to pay an obscure tax for buying a blue house on Tuesday. Or he could represent the courier company demanding payment to rush some last minute document across town. In any case, expect Irving to come up with some other off-the-wall charge that you haven't anticipated.
Now take a minute to share your newfound pearls of wisdom -- or to pick the brain (ewwww!) of someone who just wrote their last check to Irving -- on our Fool Home message board.