The Hidden Costs of Buying a Home
Buying a home is a big investment, but your purchase price isn’t the only expense you need to prepare for. Understanding the various fees and expenses that go into closing on a property can help you make a well-educated buying decision. Below, I will tell you a bit more about financial obligations you may have to meet.
Down Payment
While not required for all mortgages, a down payment helps reduce the monthly mortgage payment and may eliminate the need for Private Mortgage Insurance (PMI), which you will be required to carry if your down payment is less than 20%. A down payment also builds instant equity, which may be a source for low-cost borrowing with a home equity loan or line of credit. In highly competitive areas like Boston, Brookline, or Newton it's wise to set aside at least a 5% downpayment, and up to 20%. On a purchase of a $800,000 home, that's between $40,000 and $160,000 of cash on hand! You can get loans between 0 and 5% down, but they will be difficult to get accepted in our market.
Home Inspection
Some lenders require buyers to have a home inspection, but even if that isn't the case for you, having a home inspection is a small investment that is well-worth the cost. The up-front cost may give you an opportunity to negotiate with the seller if the inspection reveals any safety concerns. If you are offering in a competitive situation you can have an education-only inspection (ask your agent how to do this) just to know what you're getting into. Home inspection costs can vary widely depending on the size of the home, the breadth of the inspection, and the geographic location where you are buying, but it's wise to set aside $1000.
Attorney Fees
If you are buying a home, you'll want to enlist a Real Estate Attorney to help with the process. Primarily, your attorney will work to protect your deposits on the home by drafting protective language into the purchase and sale. They will also perform a detailed title search prior to closing and will work to have the seller clear up any deficiencies in title. In general, real estate attorneys charge a flat fee for service and you can plan to have this cost up to $1800, less if the attorney can also serve as the closing attorney for the lender (this usually drops the fee significantly).
Closing Costs
The chunk of change most buyers don't know about is the collection of fees associated with closing the mortgage loan—and these can add up quickly. Your lender should provide you with an estimate of how much you can expect to pay is closing costs, but plan for 3% to 6% of the home’s purchase price.
Processing Fees cover the lender's costs to prepare the loan
An Appraisal Fee allows your lender to accurately determine the value of the home to ensure you’re not paying more than the house is worth.
The first premium on your Private Mortgage Insurance (PMI), may need to be paid during the closing process.
Be prepared to pre-pay an entire year’s worth of homeowners insurance at closing
Other costs lumped into the closing costs could include survey fees (to determine the property boundaries), title insurance and recording charges (the cost for state and local governments to record your deed, mortgage and loan documents).
**All prices outlined here in are estimates based on past experiences. Buyers should consult inspectors, lenders, and attorneys for specific pricing and fees.