A home in Upper Providence, Pennsylvania, about 15 miles west of Philadelphia’s heart, tugs at you. Its stone facade guards a three-bedroom, three-bathroom interior, which opens to a deck and a verdant backyard. It is the ideal home, the one you envisioned during your search. Its price: $500,000.
Together with your real estate agent, you pen an offer to the seller. He accepts it; the house goes under contract. Thus commences a process that will sap thousands of dollars before the key to your new address drops in your palm.
Some expenses will squarely fall upon the seller, and others you will split. Yet others will be your sole responsibility.
Here is what you can expect to pay when you buy a home:
- Down payment, if you finance the purchase.
- Loan origination fee.
- Mortgage insurance.
- Survey and title search.
- Earnest money.
- Transfer taxes.
- Deed and mortgage recording fees.
- Title insurance.
Securing a Mortgage
You make a down payment of $100,000 or 20% of the abode’s value, leaving you with a $400,000 loan; a conventional 30-year, fixed-rate mortgage. You agree to an interest rate of 4.25%.
“The lender you go to for a standard 30-year, fixed type loan is not going to matter,” says Jerry Anderson, vice president of residential lending at Alliant Credit Union. “What does matter then is what service you are getting, what technology are they offering and, of course, what are their rates and fees.”
In late June, the average interest rate, according to Freddie Mac Primary Mortgage Market Survey, stood at 3.84%. But lenders – major banks, credit unions and mortgage brokers – oscillate around that figure, offering different packages.
Some may charge a higher rate but extend a lender credit or funds to offset some of your closing costs. Others may agree to a lower interest in exchange for points, or money you shell out to, essentially, buy down the monthly rate.
Loan Origination Fee
No matter what interest rate you ultimately lock, there is a slew of expenses you will owe the lender. For the mortgage on the Upper Providence house, you pay a $4,000 origination fee, which covers processing your application, underwriting and funding the loan, according to home cost calculations provided by Guy A. Matteo, associate broker with Re/Max Preferred Realtors in Newtown Square, Pennsylvania.
Varying between 0.5% and 1% of the borrowed amount, origination fees, along with other mortgage closing costs, appear on the loan estimate. Your lender must provide you the loan estimate within three business days of receiving your application. This obligation stems from the tightened financial regulations that emerged after the Great Recession.
Because of it, “the buyer will know in advance, before they even do an inspection or pay for an appraisal, what the cost associated with buying a property (is) roughly going to be,” says Sally Shiekman, real estate agent and certified residential specialist with Aspen Snowmass Sotheby’s International Realty in Aspen, Colorado.
If you were to secure a loan where you would pay less than 20% of the purchasing price as a down payment, you would need mortgage insurance to mitigate the risk to your lender.
Paid at closing or billed into the monthly outlays, this is obligatory for Federal Housing Administration loans to first-time homebuyers, who may pay as little as 3% of a house’s price upfront, as well as for Department of Veteran Affairs mortgages that command no down payment.
Before any lender signs off on a loan, they demand an appraisal. Carried out by a third-party professional, it constitutes a disinterested evaluation of a home’s worth.
For the Upper Providence home, it costs you $375, per Matteo's calculations. The appraisal presents an assessment that, if you default on your payments, the lender can recoup the borrowed amount by selling the house, which serves as collateral for the loan.
“Appraisals are becoming more and more technology-driven,” Anderson says. Due to the availability of data, he says, Fannie Mae and Freddie Mac, the government-sponsored mortgage enterprises that buy most home loans, may be able to determine some houses’ values without traditional appraisals.
Survey and Title Search
While not universally required, surveys are another means for lenders to verify the soundness of a property as a loan security. Sometimes also encompassing a title search, or an investigation into a property’s ownership, mortgage surveys examine land and structure boundaries against their descriptions on legal documents.
Unlike surveys, inspections focus on the integrity of a home. The home inspection of your Upper Providence residence clocks at $500, which is about average for a standard service.
While some inspections may be only sensible in certain locales – termite, lead-paint or radon inspections, for instance, depend on how prevalent such issues are locally – others are almost obligatory in any instance.
In North Carolina, where broker and owner of Wanda Smith & Associates, Tony Smith, operates, “the typical inspections are going to be mechanical, which is heating, electrical and plumbing, and structural inspection and a pest inspection,” he says.
After an inspection, you may request the seller make certain repairs, contribute credit for such or even lower the home’s price. If a compromise fails to emerge, you might abandon the contract, obtaining any earnest money – a prepaid, good-faith deposit on the house – back.
If the transaction inches forward, though, at closing, transfer taxes materialize. Calculated as a percentage of the sale price, this kind of a fee – a sales tax on real estate – widely differs across the nation. So does who pays them.
“In the Commonwealth of Pennsylvania, the transfer tax is negotiated but traditionally half of it is paid by the buyer and half of it is paid by the seller,” Matteo says.
The transfer tax on the Upper Providence residence clocks at 3% of the selling price, portions of which stream to the state, the school district and the township.
Deed and Mortgage Recording Fees
Deed as well as mortgage recording fees are also due at closing, which, depending on the state, could be arranged by either an attorney or a title company. Together, they cost you $227 for the Upper Providence house.
Set up at closing, escrow accounts hold funds for property taxes and homeowners insurance. If the tax due date has passed at settlement, you will reimburse the seller for levies already paid. Conversely, you might receive credit from the seller to cover the tax for the months he or she occupied the house.
The escrow account also contains homeowners or hazard insurance, which, in some jurisdictions, the seller may cover. This is not the case in Pennsylvania, however, where, at closing at the end of July, you set $2,670 in escrow and give $6,399 to the seller for already paid county, municipal and school district property taxes.
Another sort of insurance you need is title insurance, which shields you and the lender in case disputes about the house's ownership arise. While in some states the seller ponies up a portion of it, in Pennsylvania, the buyer pays it in full.
The title insurance on the Upper Providence property is $3,728, according to Matteo's calculations, including endorsements that tailor the otherwise standard policy to your needs.
On the day you become the new owner of the $500,000 residence, you have amassed $27,307 in mortgage-related closing expenses, third-party costs, escrow funds and reimbursements to the seller. In addition, you parted with $100,000 for a down payment.
Yet, subject to local decrees, loan types and personal circumstances, Smith of Wanda Smith & Associates says: “The fees involved can very easily be more than the actual minimum down payment.”
Know the lingo.
It’s spring and the start of the home-selling and buying season, and you're probably already starting to see the “For Sale” signs posted in yards as well as online advertisements beckoning prospective homebuyers. But before you allow yourself to be beckoned, it would behoove you to familiarize yourself with the following 10 terms – especially if this is your first time making one of the biggest purchases of your life.Fixed-rate mortgage
This means the interest rate you pay on your home loan won't change. Over the years, your mortgage payment will likely change some – property taxes will likely rise, your homeowners insurance might climb or fall, or you might shed your PMI (a term we’ll come back to). But generally, if you have a fixed-rate mortgage, your monthly mortgage payment won't change much over the years.Adjustable-rate mortgage
Also known as an ARM, this is essentially the opposite of a fixed-rate mortgage. You'll have a fixed rate for several years, maybe five or 10, and then the interest rate adjusts according to the fully indexed interest rate, often the prime rate, which is what banks charge their most creditworthy customers. So while your interest rate and payments will likely be lower in the beginning than those of the homeowner with the fixed-rate mortgage, hope that interest rates remain low throughout the life of your loan. As interest rates climb, so too will your own interest rate and monthly payments.Prequalified
This can be a confusing term, mostly because homebuyers tend to mix it up with preapproved, says Rick Hogle, chief strategic officer at Supreme Lending, a mortgage company in Dallas. If your lender tells you that you're prequalified for a house, that's a good start – but you're still a long way from being a homeowner. "Prequalification requires less documentation," Hogle says. "It provides a general idea of the loan amount in which a homebuyer might qualify." This way, you can start looking for a home and have a sense of what type of house you can afford. Preapprovals require the submission of many more documents, such as pay stubs, bank statements and tax returns.Conventional loans
These are the typical loans that many people, but not all, apply for when they want a mortgage. "Those with low credit scores usually won't qualify for conventional loans," says Passard Dean, professor of accounting at Saint Leo University in Saint Leo, Florida. "In the past, you were also required to put a down payment of at least 5 percent. However, with the new guidelines from Fannie Mae and Freddie Mac, you can now put a down payment as low as 3 percent. These loans generally require a credit score of above 650.Federal Housing Administration loan
Federal Housing Administration loan
Have poor credit? You'll probably get one of these, also known as FHA loans. “These are excellent for first-time homebuyers with subprime credit scores," Dean says. "In addition to more relaxed credit scores and lower upfront costs, the down payment can be as low as 3 percent."Appraisal
This is an estimate that determines what your property is worth. Banks need homes to be appraised, in part, so they don't lend you, say, $300,000 for a house that's only worth $175,000. After all, if you can't pay the loan, the bank will send you packing and will sell the home. But most people won't buy a $175,000 home for $300,000, and knowing that, the bank doesn't want to lend you more than your house is worth.Private mortgage insurance
Private mortgage insurance
This is a monthly insurance payment you'll have to pay if the down payment on your house is less than 20 percent of the appraised value or sale price. If you don't want to pay the PMI fee – which often ranges from .03 to 1.15 percent of the original loan, divided into 12 monthly payments – you'll have to fork over a bigger down payment or buy a cheaper house. Usually, PMI insurance isn't something you pay forever (it just seems like it, if you have a small down payment). Typically, after your payments reach 20 percent of the value of your home, you stop paying PMI.Closing costs
These are fees related to buying a house that your lender charges you, or you rack up from various third parties, such as a home inspector. According to the online real estate database Zillow, expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but there are many costs involved in closing the deal, from buying title insurance to paying for points and attorney and surveyor fees.Points
One point is a charge equal to 1 percent of the loan amount. So if you're buying a $200,000 house, and a lender is charging you 2 points, that's $4,000. Three points, $6,000. Points are prepaid interest. The more points you pay, the lower your interest rate will be. If you're planning to live in your house a few years, you could make a good argument for not paying points, but if you believe you'll go the distance with a 30-year mortgage, it generally makes financial sense to pay as many points as you can to snag that lower interest rate, which, in the long run, could save you money.Escrow
This word can be used in a few different ways, but when you think escrow, think of a third, neutral party. For instance, a deposit you make after your offer on a home is accepted would then be put in escrow. Usually you can’t recoup these deposits if you back out of the contract, but if the seller decides to sell the home to somebody else, you’d most certainly get your deposit back. The escrow account keeps your deposit safe so the homeowners don't inadvertently spend your money. You might also hear your lender talking about an escrow account where your property taxes and homeowners insurance go until they're paid.Read More