Hidden/Closing Costs of Buying a Home

October 4, 2018

If you have been saving for years for a down payment to buy your first home, did you know that you also need cash at the time of closing to pay for the closing costs?  So say you are saving to buy a $500,000 house and have saved 20% ($100,000) for the down payment.  While that’s great, you will need to save more to pay the closing costs.  The closing costs depending on the transaction are typically 2.5% of the final sales price.  So for this example, 2.5% of $500,000 is $12,500!  Thus, you will actually need $112,500 to buy to house

 

Here's a breakdown of the potential closing costs that you could be asked to pay:

 

Origination Fee - Fee charged by your lender for creating the loan.  This fee is typically around $1,000 depending on the size of the loan. 

 

Discount Points - Fee charged by your lender for lowering the interest on your mortgage loan.  Each discount point generally costs 1% of the loan and can lower the interest rate by 1/8% to 1/4%.  It is not a required fee, but a worthwhile investment if you have the money.

 

Credit Report/Loan Application - Fee charged by your lender for applying for a loan.  Usually less than a $100, but you can negotiate to remove this fee since you are already paying an origination fee.

 

Initial Interest – Your lender will ask you to pay the first interest payment on the mortgage loan from the close date till the end of the month.  It will vary depending on the size of your loan, interest rate, and day in which you settle.

 

Prepaid Items for Escrow - You lender will require you to prepay several months of your home insurance and property taxes to build your escrow balance in case that you foreclose in the first couple homes of own the home.

 

Prepaid Private Mortgage Insurance - If your loan has private mortgage insurance, you might consider prepaying the amount to lower your monthly payment.

 

Title Insurance and Title Services - There are usually title fees that occur when a loan is closed by the title company or attorney.  The title company performs a search of the title and handles the legal side of the real estate transaction.  Typically costs around $500-$1,000 dollars.  Title insurance is required by the lender to protect against any claims on the house.  Title Insurance costs around 0.5% of the cost of the home.

 

Property Taxes - If the previous owner prepaid the real estate property taxes for that year, then the buyer has to pay the prorated amount for the rest of the year.  Real Estate taxes in Virginia are roughly 1% of the market value of the home so depending upon what time of the year you buy the home and if the sellers have paid the taxes already, the cost could be anywhere from $0-$3,000 for a $300,000 home.

 

HOA/Condo Association Fees - If your property is in an HOA or Condo Association, the association typically has new member fees that you will have to pay.

 

Appraisal - Majority of lenders will require an appraisal of the home to validate the market value of it.  Usually costs around $300-$500.

 

Recordation Tax - The local government charges a fee to record the sale of the home.  In Virginia, the recordation tax is $0.25 on every $100.  So that comes out to $750 for a $300,000 house.

 

Special Loan Origination Fees -  Special loans like a VA loans for veterans have large funding fees so depending upon the type of loan you get, it could have extra fees.

 

So in recap, it is good to understand that you will need money in addition to the down payment when purchasing a home.  I think it is safe to expect to pay around 2.5% of the purchase price.  To learn more about the buying and mortgage process visit our pages in the Live section of our website!

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