Purchasing a home is an expensive proposition. After all, it is most likely the largest purchase you will make during your lifetime. Besides the sales price of the home, there are several other costs associated with the real estate transaction. Awareness of these costs will help you structure your financing so that you are prepared to purchase once you have found a property.
The costs to purchase a property can be divided into four categories:
- Down Payment
- Closing Costs
- Escrow Account
- Miscellaneous Fees and Inspections
- Rule of Thumb for Calculating Total Cash Required in metropolitan area
As a general rule of the thumb, when purchasing in metropolitan area, you can expect the sum of your closing costs, escrow account and miscellaneous fees and inspections not to exceed 2% of the sales price plus $2000. For example, on a $300,000 property, you would want to budget $8000 plus your down payment. Closing costs can be lower or higher than this figure, but it is a good rule of thumb.
So, what makes up that 2% plus $2000? Let’s start with the $2000. These are fixed costs fees that will not vary regardless of the sales price.
These fees break down into three categories:
- Lender Fees – $900-$1300 Although lender fees vary, a reputable company will charge no more than $1200-$1400 in fees. Most of these fees are paid to third party vendors such as the credit bureaus and the appraiser. The appraisal report(s) can cost between $400-$700 depending on the type and complexity of the appraisal.
- Title Company & Attorney Fees – $800 The title company handles the legal side of the real estate transaction. They will research any ownership, property line or tax issues that could affect the transaction. They also prepare and record all of the legal documents with the county. Miscellaneous Fees & Expenses – $300 These fees will vary depending on the transaction. For instance, you may elect to obtain a survey of the property.
- Miscellaneous fees – might include a homeowner’s association initiation fee or termite inspection fee.
And the variable fees of 2%? These fees also fall into three categories:
- Taxes – 0.7% of the sales price. Each State has a different name for the “sales tax” associated with purchasing real estate. In metropolitan area, the taxes are called Deed & Trust taxes. The Deed tax is $3.33 per $1000 of the sales price and the Trust tax is $3.33 per $1000 of total loan amount.
- Title Insurance – 0.6% of the sales price. Title insurance is issued by the title company and protects you from “defaults in the title chain.” Believe it or not, even though you pay for the house, on rare occasions (due to circumstances such as forgery) a court could determine someone else has legal right to the property. Title insurance insures the loan and you from such an occurrence. There are two types of title insurance. Lenders insurance insures the loan and is always required ($3.00 per $1000 of the loan amount). Owners insurance is recommended but not required ($2.00 per $1000 of the sales price) and covers the equity you have in the property. In both cases these are one-time fees.
- Escrow Account & Prepaid Interest – 0.7% of the sales price. An escrow account is like a savings account that is held by the mortgage company. Keep in mind this amount is not a cost, but a savings account. When you refinance or sell your property you will be refunded the remaining balance in this account. Part of your monthly mortgage payment is deposited into this account to pay taxes and insurance when they come due. When you escrow taxes and insurance you are required to establish a minimum balance in an escrow account (approximately 3 months of payments upfront). You will also need a paid receipt for your Home Insurance policy (most insurance companies will charge you for a full year upfront). In addition to the escrow account you will “prepay” interest on a per-diem basis for the first month of ownership. In other words if you buy a house with 5 days left in the month, you will pay 5 days of interest at closing. This is why you “skip” the first month’s mortgage payment and also why most real estate transactions occur at the end of the month. Based on Virginia’s real estate tax structure, your escrows and prepaid interest will approximate 0.7% of the sales price.
This content was shared by a lender with First Home Mortgage.