I previously wrote about hidden costs and other issues in the first half of the home buying process. Things that realtors and bankers don’t seem to tell you unless you figure out how to ask the right questions. As a follow-up, now I am doing the same for the second half. The closing and beyond. Just a note, I’m not even including things like cable television, utilities, and trying to find affordable home security system packages.
To refresh yourself on the first half, you can find it here.
Closing Costs
Most of the hidden fees, and the most expensive fees, involved in home buying are tucked away under the heading of “closing costs.” The fact that you write one check for the whole shebang means you aren’t using an entire box of checks in one day. But it also means that the whole thing is that much more confusing and less likely that you will be prepared for them.
Luckily, a common practice is developing of making the seller pay closing costs. This is actually a misnomer. The seller isn’t going to pay diddly-squat out of their own pocket. It’s going to come out of the proceedings of the sale of the house. Which means YOU are paying the closing costs. But instead of paying them at closing, you are paying them over 30 years. Still, if you don’t have an extra couple grand laying around for closing costs, this is the way to go.
Origination fee
The bank will charge you 1% of the loan just to give you the money. Why this is charged, I have no idea, because they then charge you for everything involved in them actually writing the loan. See the next four items.
Improvement location survey
Expect to get charged $150 for the loan filling out paperwork. This name makes absolutely no sense since it has nothing to do with improving a location. Unless, maybe, your money is buying a new potted plant for the mortgage broker.
Document preparation
This is another $100-$200 charged for filling out paperwork. At least this name makes sense.
Real estate closing fees
You will get charged $175 just to be done with the whole thing. Typically, this is split between buyer and seller, so actually, you are charged $87.50.
Recording fees
Uncle Sam takes his pound of flesh by charging $35 for your documents to recorded into state records.
State documentary fees
Remember reading about the Stamp Act that Britain enacted against the colonies just prior to the Revolutionary War? We fought a stinking war to avoid that tax, just to institute it on ourselves. One cent per thousand dollars of the loan.
Points
Their full name is “discount points.” Basically, it is possible to buy a lower interest rate by paying the bank another up to 5% of the loan amount. Frankly, I see this as little more than a bribe, because it doesn’t go towards paying down the loan. Interest rate charged is supposed to be an indication of risk. By giving up a couple extra grand now, you are less risky to default 10 years down the road?
Title insurance
You just spent a couple hundred dollars for the bank to fill out paperwork. Now you have to buy insurance against the possibility that it was filled out wrong! This is a one-time fee of ~$100
Pre-paid costs
You would think that after giving the bank thousands of dollars for the privilege of loaning money from them, you would be done. But you would be wrong. They are going to want, up front, the interest for the rest of that month, an entire year’s home-owner’s insurance premiums (wait, what? I’m getting my insurance from my car insurance company, not through my bank), a couple of months of the following year’s insurance premium, and a few months of the property taxes.
Realtor fees
Actually, don’t worry about this one. Even though a buyer’s realtor works for you and your interests (getting you the best deal, etc), they get paid by the seller. Actually, they get paid by the seller’s realtor, who is paid by the seller. But you never see this charge.
Private Mortgage Insurance (PMI)
Some jerk, somewhere along the way, decided that if you own less than 1/5 of your house, you are more likely to default on your loan. So if you pay less than a 20% down payment, the bank is going to require mortgage insurance. Supposedly, it’s insurance against you not paying, but a FHA loan is already guaranteed against that, and if PMI actually paid out, the real estate bust in 2007 wouldn’t have affected the global economy so bad.
Depending on the size of the down payment, your credit, and the term of the loan, the annual premium can be anywhere from a third of a percent to 1% of the amount you borrowed. More details on calculating PMI can be found at http://www.dailyinterest.com/library/PMI/How_to_calculate_PMI.html.
Once you have paid off enough of the loan that you have at least 20% equity, you can tell the bank to cancel the PMI. If you forget to do this, federal regulations require the bank to automatically drop PMI once you hit 22-23% equity. If they don’t, you can get the excess PMI payments back.
Home-Owners Associations (HOA)
Frankly, I hate HOA’s. One of the biggest pro’s of home ownership for me is what I call personal sovereignty. It is the idea that you can do whatever you want within the limits of the law. If I want to paint a wall red, I can. If I want a 12 foot fence to keep my large-breed dog from getting out, I can build it. If I want to build a deck, or put in a swimming pool, I can. If I want to install solar panels, then I’ve got my own clean-energy to feed my facebook habit.
But HOA’s mean that you may own the building (or even just the inside of the building), you don’t own the land. You are renting it from them, even though you are still paying the taxes and doing the upkeep. But the HOA can keep you from painting certain colors or building a certain things. My roommate can’t leave his lab/German Shepard mix outside unattended because the 3 foot tall fence that is allowed is nothing for the dog to leap over. Okay, enough of my rant.
Unfortunately, in Fort Collins, HOA’s are a fact of life. When calculating how much you can afford, make sure you take into account HOA fees. $150-$250 per month seem to be about average. So if you decide you can afford a housing payment of $1500/month, it is really more like $1250/month.
Taxes & Insurance
You won’t have a landlord who pays this stuff anymore. The listings will list the estimated property taxes. You actually pay the bank the property tax as part of your mortgage payment and then they pay the property taxes for you. They do it that way because they don’t want you forgetting to pay and then the government takes your house and sells it for what you owe in taxes, leaving the bank high and dry for the money they spent on it. Tax rates for <$150,000 homes in Fort Collins seem to run about $700-$800/year
Insurance is another one of my rants. Not because I question the need for it; I don’t. That’s an awfully large purchase and an awful lot can go wrong with it. No, my rant is over the fact that it is nearly impossible to get a rough idea of what insurance costs are before you have a specific address. C’mon, insurance companies. Why can’t you offer an non-binding ESTIMATE based on zip code and price-range? Best guess for my price range in Fort Collins is $700/year.
Do make sure you get all the coverage you need. Live in an earthquake-prone area? Earthquake coverage is extra. Tornado coverage- extra. Flood insurance- extra. Oh, and just because you don’t live near the shore doesn’t mean you don’t need flood insurance. Check to see if the place is within the 100-year floodplain of a watershed. FEMA has floodplain maps you can check out.
Repair costs
Again, no landlord. So when the furnace dies, a window breaks, or a tree branch comes through your roof, you’re going to have to pay for it. (The tree branch may be covered by the insurance, check). Try to always keep some money available for repairs.
Total costs
For calculating costs, I am going to assume a $150,000 house within the city limits of Fort Collins, CO with a 5% down payment. Obviously, YMMV.
Total costs from this post: $3050 due at closing + $420 recurring (not including mortgage!)
Total costs from last post: $450-$1500
Total costs: up to $4500 over and above the down payment and $400+ plus mortgage
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*At least it’s everything I’ve found out so far. Who knows what surprises are still coming in the next couple months before we actually find a place and close on it. Also, this information is based on housing in the US and, in particular, Colorado. Always check with a licensed professional before taking my word as correct.