“My bill pile is starting to resemble Mount Everest. I hope my closing costs are all one-off fees!”
Ding! Your closing costs, or settlement fees, are unavoidable. Closing costs fall into two categories: nonrecurring and prepaid. Prepaid costs are your first payments of your homeowners insurance, mortgage interest, and property taxes, prorated from your closing date to your first month. Nonrecurring costs are one-time “thank-goodness-I-never-have-to-pay-this-again” fees (until you buy another home, that is) directly associated with your home purchase. We won’t cover all these fees now, but here are a few you should start saving for:
There’s no way around this fee, but getting an appraisal does work in your favor. An appraisal determines your home’s current, fair market value, as well as the property taxes you’ll pay. An appraisal takes into consideration the age of the house, condition of the property, square footage, and similar home prices in the neighborhood.
How does this benefit you, the buyer? If the home appraises for less than the purchase price, you can re-negotiate your offer price; if you’ve put an appraisal contingency in your contact, you can back out of the deal entirely. Banks also insist on appraisals as a matter of protection- if you’re asking for a $500,000 loan on a property that only appraises at $250,000, you’re not getting that full loan amount.
Would you buy a home without looking at it? (Hint: your answer should be “heck no!”) Not doing a home inspection before closing is the same principle. A home inspection isn’t a required closing cost like an appraisal is, but you need both. While the appraisal establishes your home’s value, an inspection delves into the home’s condition. Sure, you can visibly see that the previous homeowners haven’t given their rooms the Charlie Sheen treatment, but without a home inspector, you’ll never know about plumbing problems, a shoddy roof, or ancient electrical wiring that could end up costing you thousands of dollars to repair or replace. Home inspections, depending on where you live, can range from several hundred dollars up to $1,000.
Another reason that home inspections are entirely worth it? Should your inspector come across any major damages or determines that a major upgrade is needed, you’re in a strong position to negotiate down the home price or ask the sellers to reconcile the issue before you sign the contract.
Unfortunately, your lender needs more than an Edible Arrangements bouquet to motivate them to process your loan. Which is why an origination fee is tacked on your mortgage. It’s usually one percent of the entire amount of your loan- some serious bank considering it’s just paper service. Don’t forget to budget for this before you start house hunting.
Nope, 1-800-FLOWERS won’t be enough for your closing attorney either. You need to shell out more fees for your lawyer or title company to keep the legal side of your home purchase in order. Your lawyer will file your property and loan information with your county courthouse or town hall. He or she will also charge a one-time fee for title insurance, which verifies that no one has any claims over your home. Title insurance also pays for your legal fees should an undisclosed heir take you to court over that house. Though title issues don’t affect many buyers, neither your lender nor your lawyer want a legal situation of Jerry Springer proportions going down after your purchase.
You’ll get charged a courier fee if the lender needs to deliver financial documents. Same goes for pulling your credit report. And flood-zone certification. And putting your PMI application through. And the commitment fee, which sounds like something your wedding officiant should’ve charged instead of your lender to lock in an interest rate. Getting hit with miscellaneous fees is inevitable, so be prepared and save for these too.
Even if you have perfect credit, rescue puppies in your free time, and help little old ladies cross the street, the bank and the sellers still don’t think holding some of these one-time fees in your personal account is in their best interest. The nerve. While you close the deal, your lawyer or your title company’s escrow agent opens an escrow account to hold on to those first mortgage interest and tax payments, and a portion of your down payment as a good faith deposit.
The cash stays in the escrow account until your contract is finalized. Sound easy? Sure, but you'll still have to pay a fee for your escrow agent's time- usually one to two percent of your home cost. Again, the nerve.
This article is 2nd in the Home Costs Series