Remember the Hidden Costs of Home Ownership, Mortgage Process
Don’t pop that champagne just yet.
While the mortgage application process may seem complicated, there are actually a handful of costs and issues to consider beyond the just payments of points and interest rates. Consider the following home ownership notes …
Get Out Your Checkbook
Unexpected closing and move-in costs can ruin the best of real estate deals before they reach fruition. Many first-time home buyers are unaware of credit fees, legal charges, escrow, notary, and Realtor fees among the many closing costs. They haven’t considered the sudden glut of sales taxes, moving costs, furnishings, immediate improvements, and utility hook-up fees.
Often new buyers prepare a budget, leaving out annual mortgage costs and homeowner’s insurance.
The average cost for homeowner’s insurance in 2004 was estimated at $608. As for mortgage rates, they vary by individual credit, the down payment, and whether the owner settles on a long-term, fixed rate, or an adjustable rate. Figure at least 10% of the total cost of the house as a monthly payment.
Novice buyers frequently fail to plan for the annual costs of maintaining their new home and its appliances. The need for new paint or electrical and plumbing repairs may seem unpredictable, but they are inevitable.
Closing Costs Can Be Killers
Although the hidden costs seem like lurking icebergs, new buyers can still follow through on their purchase if they budget for them. It’s wise to lead with a mortgage calculator, not new owner emotions.
Often, first-time buyers believe that even with zero-down deals they won’t have to spend money up front. But closing costs are typically 4% to 6% of the total price of the home. Real estate agents advise buyers to have at least $1,000-$5,000 on hand just to get in the door. Although closing costs can be negotiated and split with the seller, these costs typically go beyond what new buyers usually plan to spend.
It’s important to have a frank discussion with the seller or Realtor on closing costs. A sound budget must include possible expenditures for appraisal fees and inspections. It’s wise for buyers to ask their Realtors to include a purchase agreement clause stipulating that the home has to pass inspections for stability, code violations, appliance conditions, termites, and molds.
If not, the buyer risks having to finance work to improve these conditions after they move in.
Negotiations determine who conducts the deed title search and pays for it. The title should be clear of any liens, judgments, defects, or encumbrances that a new owner may end up having to settle. Title insurance will cost from $500-$2,000, depending on the value of the home.
Any prospective owner should be aware of the itemized costs of all taxes and closing fees, including mortgage application fees that are passed on to buyers.
New homebuyers should also budget wisely for mortgage insurance. The cost is added to the mortgage principal, ranging from 1.25% for 20% down to 3.75% for 5% down. Some people purchase mortgage life insurance, a term policy that pays off the mortgage if they die, instead of leaving the burden to their families. Lenders often charge more than insurance brokers in adding this to monthly mortgage payments.
Maintenance Means More Budgeting
Once move-in costs are settled, there’s still more to pay. Annual property taxes shock many first-time homebuyers. Property taxes are levied as a percentage of the home’s assessed value. Local taxes range by municipality, but they average from 1-5% annually.
At 5%, a home assessed at $250,000 would have a yearly property tax bill of $1,250. If the previous owners paid a portion of the year’s taxes ahead of time, new owners may have to reimburse them as well as pre-pay taxes for the months ahead. They will also have to pay for annual repairs that they’re used to turning over to landlords.
It’s just one more thing to be aware of as you fill out that home mortgage application - but it’s also no reason to stop now. Just be sure to take good notes.
SOURCE: Guide to Realty