You’ve done all the right prep work to buy a home. You saved for a down payment, cleaned up your credit, and got pre-approved for a mortgage. You found a home that you can afford, and now the days are ticking down to closing—and everything seems too good to be true.
Unfortunately, it could be. Unless you are prepared for some serious expenses, you may not make it across the threshold and into the home of your dreams.
The real costs of buying a home
If you’re buying a home, be prepared to write some really big checks. In addition to your down payment—which, for buyers with average credit, could be 20 percent or more of the sale price of the home—you’ll need to pay some other hefty expenses, including:
Closing costs. Many real estate agents tell their clients that they should expect to pay closing costs equivalent to 5 percent of the cost of the home, which is a good ballpark number. However, closing costs can vary greatly depending on where you live. They tend to be higher in states like Hawaii, California, and New York, and they are usually lower in Midwestern and Southern states.
Your lender will provide you with a Good Faith Estimate (GFE) when you are approved for a loan. This document estimates what you can expect to pay at closing, including lender costs, such as administrative fees; costs for services like title insurers and inspectors; and taxes and fees required by the government.
For certain line items, such as title insurance and home inspection, you have the option of shopping around for cheaper vendors instead of using the lender’s recommendations.
Origination costs. According to a Bankrate survey of closing costs released in August 2013, which surveyed 10 lenders in all 50 states plus the District of Columbia, homebuyers taking out a $200,000 loan can expect to pay an average of about $2,400 in origination costs. That’s a 6 percent jump compared to 2012, when the same fees averaged about $2,264.
The survey did not cover some of the most expensive services—including title insurance, title search, taxes, property insurance, association fees, interest, and other prepaid items—so $2,400 is only a starting point. For example, in New York City, title insurance on a $500,000 home with a $400,000 mortgage would be an additional $2,666.
Taxes. When home prices soared ten years ago, state and local governments were quick to raise transfer and property tax rates. (Of course, they did not remember to lower them when prices plummeted in 2007.)
Transfer taxes are a one-time charge for “transferring” ownership from one party to another, and they are expressed in units of several hundred dollars. For example, if the rate is $2 for each $500, on a $200,000 you would pay $800 in transfer taxes ($200,000/$500=400, and 400 x $2=$800).
Property taxes, on the other hand, are paid as long as you own the property. They are usually paid twice a year, and they are paid in advance. At closing, you may be required to reimburse the sellers for the taxes they have already paid. Depending on the assessed value of the home, tax rates, and the date on which you close, you could face a tax bill of $1,000 or more on a $200,000 home.
One consolation: You can deduct all taxes paid at closing when you file your next federal tax return.
You may face additional costs, including special inspections—such as those for pests or radon, or inspections of a septic system—and you may want to have your own home inspection to ensure the property does not have a major issue that you might consider a deal breaker.
Keep in mind that unlike your down payment, you can borrow money from family or friends to pay your closing costs. Even so, it’s a good idea to save as much money as you can before buying a home so that you have enough cash to handle not just your down payment but also closing costs, moving costs, and any renovations or decorating you will want to do in your hew home.
Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.