Loan origination fees (points) and other loan charges: These fees and charges range from nothing to 3 percent of the amount borrowed. Lenders generally charge all sorts of fees for things such as appraising the property, pulling your credit report, preparing loan documents, and processing your application, as well as charging a loan origination fee, which may be 1 or 2 percent of the loan amount. If you’re strapped for cash, you can get a loan that has few or no fees; however, such loans have substantially higher interest rates over their lifetimes. As Chapter 12 explains, you may be able to cut a deal with the seller to pay these loan-closing costs.
Escrow fees: Escrow fees range from several hundred to over a thousand dollars, based on your home’s purchase price. These fees cover the cost of handling all the purchase-related documents and funds. We explain escrows in much more detail in Chapters 9 and 14.
Homeowners insurance: This insurance typically costs several hundred to a thousand-plus dollars per year, depending on your home’s value and how much coverage you want. As we discuss earlier in this chapter, you can’t get a mortgage unless you prove to the lender that you have adequate homeowners insurance coverage. Promising to get this coverage isn’t enough; lenders usually insist that you pay the first year’s premium on said insurance policy at closing.
Title insurance: This insurance typically costs several hundred to a thousand dollars, depending on the home’s purchase price. Lenders require that you purchase title insurance when you buy your home to make sure you have clear, marketable title to the property. Among other things, title insurance protects you and the lender against the remote possibility that the person selling you the home doesn’t legally own it. We discuss title insurance in detail in Chapter 13.
Property taxes: These taxes typically cost several hundred to a couple thousand dollars and are based on the home’s purchase price and the date that escrow closes. At the close of escrow, you may have to reimburse the sellers for any property taxes that they paid in advance. For example, suppose that (before they sell their home to you) the sellers have already paid their property taxes through June 30. If the sale closes on April 30, you owe the sellers two months’ property taxes — the tax collector won’t refund the property taxes already paid for May and June.
Legal fees: These fees range anywhere from nothing to hundreds of dollars. In some Eastern states, lawyers are routinely involved in real estate purchases. In most states, however, lawyers aren’t needed for home purchases as long as the real estate agents use standard, fill-in-the-blank contracts. Such contracts have the advance input and blessing of the legal eagles.
Inspections: Inspection fees can run from $200 to $1,000 (depending on the property’s size and the scope of the inspection). As we explain in Chapter 13, you should never, ever consider buying a home without inspecting it. Because you’re likely not a home-inspection expert, you benefit from hiring someone who inspects property as a full-time job. Sometimes you simply pay these costs directly; other times you pay these costs at closing.
Private mortgage insurance (PMI): Should you need it, this insurance can cost you several hundred dollars — or more — annually. As we explain in the next section, if you put less than 20 percent down on a home, some mortgage lenders require that you take out private mortgage insurance. This type of insurance protects the lender in the event that you default on the loan. At closing, you need to pay anywhere from a couple months’ premiums to more than a year’s premium in advance. If you can, avoid this cost by making a 20 percent down payment.
Prepaid loan interest: Lenders charge up to 30 days’ interest on your loan to cover the interest that accrues from the date your loan is funded (usually, one business day before the escrow closes) up to 30 days prior to your first regularly scheduled loan payment. How much interest you actually have to pay depends on the timing of your first loan payment. If you’re smart, and we know you are, you can work out this timing with the lender so you don’t have to pay any advance loan interest. To avoid paying three useless days of interest charges, never schedule your escrow to close on a Monday. Should you close on a Monday, the lender has to put your mortgage funds into escrow the preceding Friday. As a result, you’re charged interest on your loan for Friday, Saturday, and Sunday even though you won’t own the home until escrow closes on Monday. (This little tip more than pays for this book all by itself. Don’t you feel smart now?)
Recording: The fee to record the deed and mortgage usually runs about $50.
Overnight/courier fees: These fees usually cost $50 or less. Remember the times when you sent something via the U.S. Postal Service to a destination that you could have driven to in less than a few hours, and it took them the better part of a week to get it there? Well, lenders and other players in real estate deals know that these snags can occur without warning, and because they don’t want to derail your transaction or cost themselves money, they often send stuff the fastest way they can. And why not — it’s your money!
Notary: Notary fees run from $10 to $20 per signature per buyer. At the close of escrow, you sign all sorts of important documents pledging your worldly possessions and firstborn child, should you renege on your mortgage. Therefore, you need to have your signature verified by a notary so everybody in the transaction knows that you really are who you say you are.
As you can see, closing costs can mount up in a hurry. In a typical real estate deal, closing costs total 2 to 5 percent of the property’s purchase price. Thus, you shouldn’t ignore them in figuring the amount of money you need to close the deal. Having enough to pay the down payment on your loan isn’t sufficient.
Accumulating the Down Payment
Jeremy went house hunting and soon fell in love with a home. Unfortunately, after he found his dream home, he soon discovered all the loan-documentation requirements and the extra fees and penalties he would have to pay for having a small down payment. Ultimately, he couldn’t afford to buy the home that he desired because he hadn’t saved enough. “If I had known, I would have started saving much sooner — I thought that saving for the future was something you did when you turned middle-aged,” he told Eric.
How much money you should save for the down payment and closing costs for the purchase of your home
Where your down-payment money is going to come from
How you should invest