You’ve finally picked out the home of your dreams and figured all of the mortgage and financing information that goes along with it. You’re just about ready to plop down a relatively manageable down payment and take the keys.
Surprise! The amount of cash you owe upfront is more than double what you expected it to be! What the heck happened?
The truth is that a number of factors come into play when you’re ready to close on a home, and all will add to the amount you owe before you can move in. These are important to consider when planning what you can afford to put down on a new home, and should be carefully discussed with your realtor to make sure you’re not walking into a situation that will put you in financial crisis.
Here are the three major categories of upfront costs, aside from a down payment, that all new homebuyers must remember to plan for.
Most people are familiar with the concept of closing costs, but few truly appreciate how many factors come into play when determining these fees, and how much it can cost a homebuyer.
First, there are a number of title fees that must be paid when closing on a home. Consider that you’re buying a home for $250,000 with a $8,750 down payment. Between the owner’s title, lender’s title and other considerations, these fees can amount to more than $2,000. Then the government takes a slice in the form of of a recording fee and transfer taxes. You’ll more than likely need to pay a third-party to conduct a survey and an appraisal of your property. Finally—and this variable can differ dramatically—different lenders charge different loan origination fees.
Everyone has heard of closing costs, but few realize just how many separate costs are included in that concept.
So you’re now looking at a downpayment as well as significant closing costs…and you’re not out of the woods yet. There are still further upfront costs to be paid before you can enter your new home!
The most common pre-paid cost that buyers must put down before acquiring a home is the homeowner’s insurance premium. Most loans will require at least one year of homeowner’s insurance paid in advance. For the aforementioned $250,000 home, that will come to around $2,400 added to the bill upfront.
FHA mortgages, the most common form on the market, require buyers to escrow for taxes and insurance. This means that you’ll end up paying one-twelfth of your yearly taxes and the insurance premium as part of your monthly mortgage payment.
Although that’s a monthly charge, buyers will be forced to start an escrow account, held by the lender. Typically, buyers must put three months worth of the insurance premium, as well as three months worth of the property taxes, into that escrow account.
Needless to say, you owe far more than your initial down payment at this point. For a full explanation of the charges that will come due when you buy a home, make sure to check out our video on the subject here. It’s important to keep closing costs, pre-paid costs and escrows in mind when looking for your perfect home.
Primary Mortgage Residential wants to help you get into a new home, and we offer a variety of resources to help you understand the financial process and how to get the best deal on your way to that home. Use these options to get expert tips on shopping for loans.
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