So in my last post, I talked about Buying a House.
At the end of the post, I alluded to the costs of buying a house that most people may not really think about or consider as a 1st time home buyer. I was vaguely aware of the “closing costs” when buying my first house since I had seen those shows in HGTV like Property Virgins and the like.
However, after actually getting my offer accepted, and looking at the escrow paperwork, my eyes are now open.
Closing costs are a big deal. You need more money upfront than you think.
Ok, first things first, you will get a document known as the HUD-1 (Settlement Statement) from your lender which delineates where all the money is going. At first glance, this document is somewhat daunting, although I believe they have tried to make this process more transparent through this document. I will outline the costs which I think are most important to understand here.
Fair warning, it may make your eyes glaze over and skip down to TL;DR:
Origination Points (Line 801): This is the mortgage broker fee for creating the loan.
Discount Points (Line 802): In order to negotiate a lower interest rate, you may pay a little more upfront and then pay slightly less interest rate. In general this lower interest rate should offset the higher initial upfront cost. Make sure you understand the two differences and really chart it out to see how much you are paying differently over the life of the loan. The monthly payment isn’t as important as the overall interest paid (unless you can’t afford the monthly payment of course).
Appraisal Fee (Line 803): Pays for the independent appraisal of your home. This is primarily to make sure you aren’t overpaying (or significantly underpaying) for your house. The bank doesn’t want to sell you a house that you are overpaying for. If you can’t pay for it and they need to sell it, they want to make sure it won’t be too difficult.
Credit Report Fee (Line 804): Cost to pull your credit report. Not much you can do about this one.
Application Fees (Line 811): What you pay to apply for your loan. Try to have this waived if possible, talk to your bank. Every little bit helps.
Initial Interest (Line 901): You have to pay for the interest on your loan that accrues between acceptance of your offer and actually closing on the house. Someone is always paying interest…
Private Mortgage Insurance – PMI (Line 902): You may be required to take out PMI if your down payment is less than 20%. This protects the bank in case you can’t pay and they have to repossess the house and then can’t sell it for the the remaining balance of the house. You should be able to negotiate this away. Don’t pay PMI if you can help it. In most cases, if you they force you to pay PMI then they consider you a significant risk, and you probably shouldn’t be buying that house anyways.
Homeowner’s Insurance (Line 903): I don’t think any bank will lend you money without Homeowner’s insurance on board anymore. I will advise you to get good quality homeowners insurance. You will need to check into which company is best for your state, and it may cost a little more. However, in the event you actually need to use your home owner’s insurance, the extra cost is worth it. I’ll explain this further in a future post. TL;DR, don’t buy Honest Guy Jimbo’s Howze Inserunce, please buy from a reputable provider.
Property Taxes (Line 1003): The escrow company collects these taxes for you monthly and then pays for it at the end of the year. Death and taxes, this is the one that varies the most.
Title fees and Title Insurance (Lines 1101 and 1104): This protects your lender from claims against the house.
Government Recording Fees and Taxes (Lines 1201-1205): This varies based on location, but is basically just a fee to record the buying/selling of the house and any applicable taxes.
Survey Fee (Line 1301): If a survey is required, the lender will charge you for it. You may need to have a survey of your house for any host of reasons, but I think the most common one has to do with any boundary issues between you and a neighbor and/or evaluation for flood insurance risk.
The long and short of it is that closing costs are not insignificant. A portion of these costs are also percentage based on how much the house is selling for. Therefore closing costs for a $300k house are significantly different from a $1 million house. The general rule of thumb is that you will pay 2-5% of the house price in closing costs. So between $6k and $15k for a $300k house or between $20k and $50k for a $1 million house. This wide variation is heavily dependent on the taxes of your specific location. Either way, it’s not an insignificant amount, especially if you were already over budget on the house as it is.
Ok then, so what are your options?
First of all, there are plenty of calculators online (both simple and complex) to calculate closing costs. By now you should have a budget and location in mind so plug in the numbers and you’ll have a good idea of what closing costs you can expect. There are other options to dealing with closing cost though. You can ask your lender to roll the closing costs into the mortgage which might help with upfront costs. Of course, now your loan increases and so does your amount of interest paid (even if the interest rate stays the same).
Another option is to have someone else deal with it for you. As a home-buyer you can ask to have the seller pay closing costs. Depending on the seller’s needs/priorities they may pay for some (or all) the closing costs. This is common to ask for, however, in “hot markets” the likely answer is a flat “no”… but it never hurts to ask.
Study your HUD-1 and break out your calculator. Do all the calculations yourself to double-check that all the numbers match up.
Closing costs are not insignificant and there is a long list on your HUD-1.
Closing costs are heavily dependent on the taxes of your location.
Prepare yourself. Use a closing costs calculator, and adjust your budget accordingly.
Buy homeowner’s insurance from a reputable company. If you ever have to make a claim, you’ll be glad you did. (Story on this later)
Remember you can ask to have your closing costs rolled into your mortgage, or have the seller pay. Doesn’t hurt to ask.
Stay tuned for a future post about “What to do after closing on a house”.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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