The price tag on your dream home isn't the only thing you are going to pay for. The list of added fees could be long, and may vary across states and countries. This article will help you know which fees are commonly associated with buying a home. Be prepared for them – know what these fees are for and when you have to pay for them.
1. Earnest money – Think of earnest money as a sort of reservation fee: it's a sum that indicates seriousness to purchase property. The amount may vary across localities, customs, or even the whims of the seller. For instance, the seller could ask for a bigger earnest money amount because of the buyer’s request for extended period to closing, or because of the buyer’s inability to secure a mortgage. But usually the amount of it correlates to that of the purchase price. Another thing to note about earnest money is that it could be held secure by a third-party account known as an escrow account. This is the recommended option since an escrow account protects both the interests of the buyer and the seller. The typical arrangement is that when the selling transaction is finalized, the earnest money is put in as part of the down payment. In the case where one party backs out, the money will be handed to whoever was willing to push through with the transaction – to the seller if the buyer backs out, and vice versa.
2. Down payment – The down payment is the biggest chunk in the list of fees payable before closing the selling transaction. Usually, buyers should shell out 5 to 25% of the total price of the house while the remaining cost is shouldered by the mortgage loan. The interest of the mortgage loan and the accompanying monthly payment is dependent on the amount given in the down payment -- the higher the down payment, the lower the interest rate and monthly fees.
3. Home Owner’s Insurance – This fee offers financial protection for your home against disasters such as interior and exterior damage, injury that occurred while on the property, and loss or damage of personal belongings/assets located within the property. Make sure to read your policies thoroughly so you know your coverage. Note that mortgage companies require this insurance to approve a buyer for a mortgage. You may opt to independently apply for this type of insurance but your mortgage company (especially if it’s a bank) may offer one for you for an extra cost. The amount of this fee will be based on the value that you choose and the value of your home.
4. Property taxes – The value of this varies across countries, states, municipalities, and neighborhoods. In the US, some states have property tax rates as high as 6% of the home’s value. This tax goes into the neighborhood’s public service expenses like building schools, repairing roads and sewage systems, etc.
5. Private Mortgage Insurance (PMI) – This expense plays on both the interests of the lender and the home buyer: the lender is protected in case the buyer fails to pay the mortgage loan, and the buyer will be able to shell out less money, as down payments are usually required to cover 20% of the total price of the house. The buyer could opt to pay for this for a whole year’s worth, or they could have it rolled together with their monthly mortgage payment.
6. Appraisal fee – This fee is for when a professional appraiser evaluates the home you’re going to buy in terms of its market value – checks for the features in the interior of the house, and also goes around the neighborhood to check how much the other houses are worth for. The cost for this range from $300 to $500, but homes located in remote areas could cost more. Mortgage companies require an appraisal of the property they are about to (partly) purchase for you so that they can make sure if the house is worth more than you’re borrowing. In the event that you fail to pay the mortgage, the lender can take possession of the house and sell it, and your debt will be paid off by the sales made from selling the house.
7. Loan origination fee – Among the fees for mortgage, this fee is the largest amount. The buyer pays this to the lender to generate and process the loan. The amount of origination fees is a percentage of the total loan, usually falling between 0.5% and 1%. Buyers with a large loan amount may negotiate to lower this fee.
8. Title search fee - A title search is done to ensure the buyer that the seller is the legal owner of the house, and that there are no outstanding claims of ownership from other parties against the property. A title company or an attorney is hired to conduct this. In the US, title search fees are about $200 or below, but can vary among title companies by region. One strategy to lower the cost for this is to contact the company that currently holds the title insurance policy on the home you’re going to buy. They may offer you the old title search on file for a lower price than title search companies ask for.
9. Home inspection fee – A lender may require this before approving your loan. At first you may think of this as unnecessary but a home inspection can make or break a deal: the professional home inspector may spot faults in the home that you might have missed and were not disclosed to you by the seller such as issues with pests, fire and safety, and electrical and sewage systems.
10. Closing costs – Closing costs are usually paid after the title has been transferred from the seller to the buyer, but there are times when some of them are paid before the deal is finalized. This number carries a long list of expenses, some of which may be shouldered by the seller based on settled agreements. It encompasses mortgage loan fees, insurance fees, and other expenses that are included in the whole transaction process.
Note that some of these fees, such as the property tax and the homeowner’s insurance are prepaid costs, meaning the payment for them will recur throughout the time that buyer is the legal owner of the house. Also remember that some of the closing costs may be paid before or after the transfer of title, and some may be integrated with your monthly payment to the lender/mortgage company.