5 Factors to Consider when Buying your Home
If you’re buying a home, there’s a lot to think about. As you begin making choices from finding the best mortgage rates to choosing your color scheme, it’s probably a good idea to have knowledge of all the costs associated with buying a property.
Mortgages always carry additional costs that need to be considered before final decisions are made. Although you might think you can afford a mortgage when you look at the monthly payment, you need to look at all associated costs, as these can add up quickly.
These can typically end up between 2% and 5% of the home’s purchase price and can include a whole host of charges, such as underwriting, appraisal, and home inspection fees, just to name a few. Borrowers are encouraged to request a full rundown of all the closing costs, called a closing disclosure, from the lender.
This protects the home’s structure and contents against many named perils. Lenders require that borrowers purchase this insurance as a prerequisite to a loan. If the borrower doesn’t choose a homeowner’s insurance policy before closing, the lender can choose one for them. Borrowers are better served by shopping for their own insurance in order to maintain lower monthly mortgage payments, but sometimes they may not have a choice.
The amount of property taxes paid is determined by the home’s location (zip code) and the assessed value of the home. Taxes can amount to a significant yearly amount which can be hard to budget for. Homeowners need to set aside thousands of dollars each year to pay a lump sum to the tax collection agency whenever the due date arrives. Alternatively, lenders can take care of property taxes by including them as part of the monthly mortgage payment. Lenders spread out the yearly amount over each month and into an escrow account (the same way they do with homeowners’ insurance). This way borrowers don’t have to pay a lump sum, they can budget their monthly costs, and they don’t have to pay the taxes directly to the government agency.
Homeowners’ Association (HOA)
Condos, gated communities, and other types of properties may be subject to Homeowners’ Association (HOA) fees. The HOA’s board of directors determines the amount, frequency, and use of the fee–so borrowers need to assess these amounts before purchasing the property in order to avoid any surprises after. Since these fees come from a third party, lenders do not collect on them. However, lenders do conduct an assessment of the HOA’s finances to make sure that the property is being properly maintained.
Thankfully, realtor fees only apply to the seller, since realtors make their commission off the home’s selling price. Nevertheless, buyers are encouraged to seek out realtors during their home search as they can provide valuable guidance.
Escrow can be a confusing term and mean different things in different circumstances, so we need to make a distinction between being in escrow and an escrow account. When a borrower is about to close on a home, just before they dot the i’s and cross the t’s, an agreement is made between buyer and seller: the buyer provides a deposit that amounts to a specified percentage of the sale price, and the seller removes the home from the market. A third party holds the money before it transfers hands. In this sense, both the property and the initial deposit are in escrow until the closing is complete and the property and deposit change hands.
Meanwhile, an escrow account is an account that the lender maintains to make payments for property taxes and/or homeowners’ insurance. As mentioned above, borrowers can opt for the lender to pay their property taxes and homeowners’ insurance. To do this, the lender includes these amounts in the monthly mortgage payment. The escrow account receives the part of the monthly payment that’s destined for taxes and insurance. When the time comes, the lender then uses the amount held in the escrow account to pay both.
The bottom line
Understanding the total costs that go into buying a property is the way to go. As we’ve covered, your monthly mortgage payment is not the only expense you’ll incur. Make sure you calculate and can afford other required costs such as property taxes and homeowners insurance, as well as budgeting extra costs such as maintenance fees, condominium dues, and other payments.
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