BE AWARE OF ALL THE COSTS: EXPECT OTHER FEES
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In addition to your mortgage, you will need to consider a few other expenses as you prepare to buy a home. As you learn about these expenses, you will be more organized and will be able to manage your budgets more effectively.
- Property taxes
Property taxes pay for the city’s roads, public services, and schools.
Property tax rates usually range from 0.5% to 2.0% per year of your home’s assessed value. In some states, property taxes are reassessed each time a home is sold. Thus, the previous owner of your home might be paying a property tax that was set in 1978, while your new rate may be significantly higher. Please consult your state’s tax laws to see how property taxes are assessed.
- Title insurance
Title insurance protects you and the lender against ownership disputes. If there is a problem with the “chain of title,” which is just the sequence of buyers and sellers throughout the years, or an old lien on the property that nobody discovered earlier, or a dispute about property lines, then title insurance will take care of those problems.
Some lenders might require title insurance throughout the life of the loan, so you might have to add it into your monthly cost of homeownership.
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QUICK NOTES
- In addition to your mortgage, you need to beware of other costs of homeownership including, property taxes, insurance and other fees.
- Property taxes usually range from 0.5% to 2.0% per year of your home’s assessed value.
- Some lenders may require title insurance through the life of the loan. All lenders require that you maintain homeowner’s insurance policy.
- There may be other fees associated with obtaining a loan including application, document and appraisal fees.
- Owners of condos and townhouses may be required to pay homeowners association dues.
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- Homeowner’s insurance
Lenders require that you maintain a homeowner’s insurance policy (sometimes called a hazard policy).
This policy covers dangers like fires, floods, hurricanes, tornadoes, lawsuits resulting from injuries to people on your property, and sometimes theft or vandalism. Depending on the area of the country in which you live, monthly premiums may be from $10 to $100 for every $100,000 in coverage.
- Loan application fee
This fee covers the lender’s cost of examining your application and checking with credit bureaus, your old employers, and references.
- Document fees
This fee covers the cost of filling out forms, typing the loan documents, and photocopying. Sometimes you can negotiate the removal of extraneous document fees.
- Appraisal fee
Lenders will charge you an appraisal fee to have a professional appraiser estimate the fair market value of the home.
Because you might hire an appraiser yourself when you are shopping for your home, speak with the loan officer to determine whether the bank will accept your appraiser’s estimate.
- Points on a loan
Points are tax-deductible fees that lenders may charge for giving you the mortgage.
A single point is one percent of the mortgage amount.
Lenders usually offer several options for loans involving different interest rates and points. For example, a lender might offer two different loans: one with 2.5 points and a 7.25 percent rate, and another one with 1.5 points and a 7.50 percent rate.
Although you would pay more at the beginning of the first loan with 2.5 points (compared to the second loan with 1.5 points), over the period of the loan you might save more money with the mortgage with the lower interest rate.
Points paid are deductible for income tax purposes, but must be amortized over the life of the loan.
- Homeowners association dues
Owners of condominiums and townhouses may be required to pay monthly dues to a homeowners association.
In general, you will have two groups of expenses to consider when buying a home: those that you pay at the beginning of the loan and those that you pay throughout the life of the loan.
Be sure to ask your loan officer to name all the various “closing costs” for a home loan and how much they typically are. The total amount of these costs, plus the down payment you can pay, will be the amount of money you need, in cash, to close your loan.
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