by Dawn Allcot
When you’re shopping for a new home, you probably have some idea of what you can afford. Most calculations should include a 20% down payment, along with monthly payments of principal, interest, taxes and insurance.
But are you coming to the closing table with enough money in the bank? Some first-time homebuyers, especially, get tripped up on real estate closing costs and other hidden costs of buying a home. Follow our checklist to make sure you’re not forgetting anything when you buy your home, including real estate closing costs, home insurance and other sneaky expenses.
Mortgage Costs and Underwriting Fees
You’re already shelling out hundreds of thousands of dollars for your new home. But did you know you also have to pay to apply for a mortgage? While policies differ amongst lenders, most lenders charge a loan origination fee or an underwriting fee.
The underwriting fee goes to the person who evaluates your mortgage eligibility and approves or denies the loan. Investopedia estimates underwriting fees in most regions to range from $500 to $900.
Loan Origination Fees and Other Mortgage Expenses
Similarly, a loan origination fee may go toward other costs that come with applying for a mortgage, including loan processing and mortgage broker fees. Some costs associated with applying for a mortgage may be rolled into a loan origination fee or shared as separate line items. These may include the cost of the borrower’s credit report, tax service fees, flood certifications if the property is in a flood zone and a home appraisal to ensure the home is worth at least the price you’re paying for it.
It’s wise to get prequalified or preapproved for a mortgage to avoid paying hundreds of dollars or more in fees only to be denied the mortgage you want at a rate you can afford.
The law doesn’t require home buyers to purchase an inspection. However, it’s a good idea to have any property you’re considering inspected by a professional third party to ensure there are no significant issues before purchasing the home.
It’s important not to confuse a home inspection with a home appraisal. An appraisal tells you the home’s market value; it doesn’t look into safety issues or things that may go wrong in the future. Even if your house gets a glowing appraisal report, that doesn’t mean there aren’t hidden issues that could cost you money down the line, according to Realtor.com. An experienced inspector may spot issues that you wouldn’t notice.
Down Payment and Real Estate Closing Costs
You’ve gotten through the mortgage process, appraisal and home inspection. But don’t put that wallet away just yet!
The pros at NerdWallet say you can expect to spend between 2% and 5% of your total loan amount in closing costs. That’s not counting your down payment, which can range from 3% to 20% or more. What real estate closing costs should you expect to pay?
Some lenders require an attorney to be present at closing. Even if it’s not mandated, you may want someone on your side that understands the intricacies of real estate law and can read and understand all the paperwork.
Most homebuyers have to pay a title search fee to ensure the home is really in the seller’s name, there are no liens on the property and the owner is allowed to sell the home. Most lenders also require title insurance, which protects the mortgage company if the title doesn’t come up clean or there’s an issue with the sale. You can also purchase title insurance to protect yourself and your stake in the home. Title insurance is paid upfront at closing and lasts until you sell the house – even if you pass away and leave the property to heirs.
You can reduce your monthly mortgage payments by paying interest upfront, called discount points. One point equals 1% of the total loan amount, or $1,000 for every $100,000. With interest rates at an all-time low, buying down your mortgage rate may not pay. But if you plan to stay in the home for a long time, you can save substantial amounts of money by paying points upfront.
Prepaid interest is different from mortgage points, which save you money over the life of your loan. On the other hand, prepaid interest covers the interest that has accrued between the closing date and the date of your first payment.
Taxes and Fees
City or county property taxes for the next two months may be due at closing, along with any Homeowners Association fees.
Lenders require homeowners to carry homeowners insurance to cover the amount owed on the mortgage should the house burn down or otherwise get destroyed. Most homeowners want to carry replacement value insurance to rebuild their home. Your first annual homeowner’s insurance payment will be due at closing; future payments will be factored into your monthly mortgage payments and held in an escrow account. The loan company or bank will pay your homeowners insurance out of your mortgage escrow account in the future.
You may be able to save money on homeowners insurance by bundling it with car insurance or other policies your family holds. It pays to shop around for the best coverage at the lowest rates.
Understanding Hidden Costs of Buying a Home
Understanding what goes into real estate closing costs and other hidden costs of buying a home can help you budget better and determine houses that you can and can’t afford. Let the Suarez Team and help you find the perfect home.
Dawn Allcot is a full-time freelance writer specializing in real estate, finance and technology. Her work regularly appears on GoBankingRates.com, Realtor.com and LoopNet.
Investopedia – Underwriting Fees
NerdWallet – Mortgage Closing Costs: How Much You’ll Pay
Bank of America – What Are Mortgage Points?