A lot of important matters should be considered when purchasing a home. The same thing applies whether the property is intended as your own living space or as an investment. The majority of seasoned buyers understand that the listing price is not going to be the amount you actually pay. With insurance, closing costs and property taxes, the final cost is usually a few thousand dollars more. In some instances this fact has a definite impact on whether you go forward with the purchase or just move on. You will see additional expenses over and above the loan amount with everything you finance. Following are 5 hidden home buying expenses.
5 Hidden Home Buying Expenses
Tax Escrow is one of the largest expenses incurred when buying a home. Even though this is not technically known as a closing cost, it can add thousands of dollars to the final bill. Lenders establish an escrow account to help pay the taxes every time someone buys a home. Rather than you receiving a property tax bill that you must pay, your lender pays that for you using the escrow account. To do this, they establish the escrow account for you with six months or more of estimated taxes.
The reason for doing this is because they do not want an escrow shortage and ask the home buyer to front the money to help maintain a cushion in case there is a sudden increase in the tax rate. Even though this theoretically makes sense, the buyer is on the hook for this expense. Of course, the amount of property taxes differ from one township to the next, but this can add up to rather a rather large sum of money, thousands in fact, just for the tax escrow.
It rarely happens, but if ever there is an overflow in this escrow account the lender refunds this to the homeowner. Whenever possible, lenders use what is in tax escrow accounts to make interest money. It makes no difference where you buy a home you should expect the lender to ask you to place several months in an escrow account for property taxes.
Homeowners Insurance. Similar to property tax escrow, lenders ask home buyers to set aside a full year’s worth of homeowners insurance before closing on a property. Although you have already dedicated this amount for insurance purposes, you will still be expected to make regular monthly payments and these payments will be on your monthly statement. When buying an investment property it is not unusual to find that the homeowners insurance is much higher than it would be for a property used as a primary residence. Each additional unit of a rental property will increase the homeowners insurance which can be more than two thousand dollars per year.
Origination Fees. The mortgage industry has gone through some very significant changes during the last five years or so. One of the major changes has been with the transparency in disclosure of fees. Prior to that buyers commonly discovered the addition of fees only when they were sitting at the closing table. At this time they were left with a couple of options. They could walk away or accept these fees and close the deal. These options were often distasteful for buyers.
The rules changed in 2009 and that allowed buyers the ability to know almost to the dollar exactly what they would be spending. Now, if any variance in the fee, the whole process must be delayed and the loan resubmitted. Although still prevalent, there has been a decline in loan origination fees since 2009 in part because of this. Most loans offer a few options for the way in which you are charged. One option is paying the lender one to two points to obtain your desired rate. Another method is to agree to a higher rate and the lender then receives compensation from the bank. It depends on what your objective is with the property as to which option is most practical. Either way, five days after the initial application for the loan you should have the information about exactly what your fees will be.
Tax Payoffs. If you purchase a property between the billing cycle for property taxes, someone will be required to pay those taxes. That person may be you and that will be another expense to ensure outstanding property taxes are taken care of. Typically, this expense does go to the buyer. Sometimes, the seller pays these taxes til the end of the billing cycle, but more often than not the buyer is on the hook for the per diem. Again, this can mean thousands of dollars more coming out of the buyers pocket.
Miscellaneous Expenses. The HUD-1 settlement statement breaks down all payments and expenses throughout the transaction. Experienced home buyers understand that every transaction is replete with miscellaneous expenses. Before any loan ever goes to underwriting, there are inspection and appraisal fees to pay and these can be as much as 1000. Then the title must be cleared before you take possession and that is an additional fee. Attorney fees, title insurance, title search, lender fees not associated with the origination fees and recording fees must all be paid and they can add up quickly to thousands of dollars.
The law states that you must receive a fee worksheet prior to the loan being submitted to underwriting. Remember, this is just an estimate and can vary a few hundred dollars from what you will find during closing. Never fear asking questions about these fees or to ask if you can reduce them in some way. It may surprise you as to what you can actually get just because you asked.
Understanding these 5 hidden home buying expenses should help during the process of buying a home.