Fees You Need to Know About Before Buying a Home
Be Prepared To Buy a Home By Understanding These Fees
When buying a home, most people focus on how much it costs and what interest rate they can get on the loan. While understanding the lending process is very important, there are some other important costs to consider as you prep for homeownership.
There are some fees, for instance, that must be paid upfront. Other fees can be rolled into your home loan. It's important to understand the difference and know what you'll be expected to pay out of pocket when you sit down at the closing table.
This list outlines the most common fees to know about when buying a home.
Private Mortgage Insurance
You may be required to purchase private mortgage insurance if you're putting less than 20 percent down on a home. Private mortgage insurance, commonly referred to as PMI, is typically provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. There are two kinds of payments: an upfront PMI premium and a monthly PMI premium. The upfront premium can be paid at closing, or be rolled into the loan. Just remember that rolling this payment into the loan--and the monthly PMI premiums--can affect the size of your mortgage payment.
When borrowing money to purchase a home, insurance is a requirement you can't skip out on. A homeowner's insurance policy combines personal liability insurance and hazard insurance to cover a dwelling and its contents. In many cases, this means buying a policy before closing on the home. You'll have to pay the first year's premiums to your insurance company to show that you have insurance in place before you close. After that, you can escrow the annual premiums into your mortgage payment.
Title insurance is designed to protect the lender in case an issue arises with the title to the home you're buying. You're usually required to buy lender's title insurance, which is rolled into your closing costs or financed into the loan. Title insurance for yourself is optional, but it's something to consider if you're worried about a title issue affecting your ability to keep the home after the fact.
An appraisal is needed so that the current fair market value for your home can be established for tax purposes. It's a written justification of the price paid for a property, primarily based on comparable sales of homes nearby. The lender needs the appraisal to make sure the home is worth the amount you want to borrow. This is one fee you'll pay to the lender upfront before the appraisal can take place.
During the closing process, an escrow account will usually hold the money while the buyer and seller finalize the agreement. In addition, you’ll probably have a portion of your monthly mortgage payment go into escrow in order to pay for property taxes and insurance. Essentially, you prepay some of the homeowner's insurance and property tax costs for the home ahead. Each month, part of your mortgage payment is diverted to this escrow account so that your annual property taxes and homeowner's insurance premium can be paid on their next due date.
Points or Origination Fees
An origination fee is paid to the bank or lender for their services in creating the loan. A point is 1 percent of the loan and is often worked into the total cost of the loan. Similar to escrow payments for insurance or property taxes, these additions can increase your monthly mortgage payment.
Credit Report Fees
In order to secure a loan, the lender will require a verified credit report. This fee is typically small, around $25, and the lender may ask you to pay it when the credit check is done, or add it into your closing cost total.
Document Preparation Fees
The lender, broker, or closing attorney will usually have a fee to cover the preparation of the required documents for the loan and closing paperwork. These fees are typically rolled in closing costs for the home and may be covered by either the home buyer or seller.
A survey is a drawing or map showing the precise legal boundaries of a property and other details. If an existing survey of the land cannot be obtained, a new survey will have to be conducted in order to determine the exact boundaries of the property.
Pest or Mold Inspection
While not generally required for a brand new home, the purchase of an older home may require an inspection for pests such as termites as well as mold. This requirement can vary by location, and the cost usually runs between $200 and $500.
In some cases, you may owe some property taxes immediately if the seller has already paid taxes for a time period where you will be the owner. Also, there may be other municipal taxes or fees for sewer or water that need to be taken care of. These fees are usually escrowed at closing.
State Recording Fees
Depending on where you live, there may be a fee required for recording and holding the information regarding the sale with your county register of deeds.
Keep in mind that not all of these fees will always apply and they may even vary from state to state. Some may be waived or paid for by the lender or home seller. Regardless, it's important that you understand what the fees are and who is responsible for paying them.
Before you finalize the purchase of your home, talk to your real estate agent, lender, or closing attorney and ask for a preliminary HUD statement. This standard form is used across the United States to itemize services and fees charged to the home buyer by the lender or broker when applying for a loan. Reviewing this statement before finalizing the purchase of your home will help you understand what fees you're responsible for.