According to Lindsey Michael, a mortgage loan consultant at Kinecta Federal Credit Union in San Diego, California, the hidden costs of buying a home can be extremely complex.
"Typically the seller of the home and the lender fronting the money are not always the ones charging all these fees, so the more a buyer can educate themselves on what to expect, the easier the closing will be," says Michael.
One thing is for sure: Knowing about these hidden costs can help you know exactly how much of a loan you'll need to cover all your bases. Read on for five things you should add into the bottom line of your home purchase to avoid any surprises.
Hidden Cost #1 - Property Tax
No matter what type of mortgage you have, you'll most likely have to pay property taxes. Your property taxes could either be calculated as a percentage of the purchase price or the estimated value of the home, says Jeremy David Schachter, an Arizona-based mortgage advisor and branch manager at Pinnacle Capital Mortgage.
"The best way to get a grip on this charge and stay ahead of the game even before you put in an offer on a new home or begin a refinance, is to speak with a title or escrow representative," says Michael. "They can give you an accurate breakdown of what to expect to pay, because these fees change all the time."
One other piece of advice: Michael says you can get certain property tax breaks as a homebuyer that you might not have prior knowledge of.
"If the property is classified as a historical property, in many states, there is a giant tax break to take advantage of," says Michael. For example, "In California, the Mills Act guarantees low taxes for those that have been approved, and many other states participate in similar programs which would save thousands per year on taxes."
Other tax exemptions that could save you thousands, she says, are available for things like installing solar panels on your new property. The bottom line is to take the time to research and see what tax breaks may be available to you in your area.
Hidden Cost #2 - Home Association FeesIf you buy a home within a homeowner's association, often you'll be required to pay a monthly or quarterly fee, known as a homeowner's association fee (HOA), that covers things like maintenance of your neighborhood's shared spaces, gatherings, and other miscellaneous expenses. Generally, the more expensive and frequent the services the neighborhood board provides, the higher the HOA will be.
"HOA fees are very common," says Schacter. When looking for a new home, he says the listing should state if there is a homeowner's association or not in the neighborhood. If so, there will be an HOA fee for you to pay.
Schacter adds that once your offer is accepted, there should also be an addendum you sign to acknowledge the HOA fee. However, "some fees that might be a surprise at closing might be HOA transfer fees and other processing fees," says Schacter. "The title company usually orders a HOA buyer package for the transfer and can give a more accurate picture of the fees before the buyer goes to the closing table."
Best to hone in on this number before you close so you're not blindsided by it, advises Schacter, and be on alert for rises over the duration of your homeownership, as fees can rise or be amended as needed for communal repairs or new provisions. Unfortunately, short of moving, you have no choice but to pay your HOA. There's no negotiation here, and no real restrictions on increases. Your best recourse is educating yourself so you can add this payment into your bottom line and budget for it.
Hidden Cost #3 - Home Inspection Fees
Before you put in an offer on a house, Michael says you should always schedule a home inspection, where a professional walks through your space looking for structural issues and potential housing problems. Typically, you'll have to front this cost out of pocket, but Michaels says it's worth every penny.
"Even if an inspection is not required, it's worth paying a professional to evaluate the house so you can avoid spending hundreds of thousands on a train wreck disguised as a house," she says. But how much will it add to the upfront cost of your home?
According to Michael, home Inspections can run anywhere from $100 to close to $1,000 depending on the city, square footage, number of structures on the property, and property type. Schacter says pools, spas, and guest houses will also drive up the cost of your inspection, as will the need for any type of roofing, radon, or pest control inspection hired out to an additional company.
While most professionals will give you a ballpark inspection cost estimate, Michael has a few tips for potentially lowering the fee for this service.
"A great way to cut costs on a home inspection is to put an ad in a free local classified section offering a gig to a local inspector, and put the price you are willing to pay," says Michael. "Then let the 'applicants' come to you! Inspectors occasionally may offer half off specials when their business is slowing down, so why not beat them to the punch."
Having to pay this one-time inspection fee may be a bummer, but it does have it's benefits, says Michael.
"There are simply things that you might not think to check, such as if every light switch works, if there is moisture under the sinks or hidden pipes, or if there is any sign of water damage under the house," she says. "If anything like this is found, you can use the report to get up to thousands of dollars knocked off your sale price or to get the seller to perform the repairs. Definitely show up to the inspection and ask away!"
She advises having the pro point out the details of any issue to you in person so you can explain it when the time comes to fix it. "For any repairs needed, call up a licensed contractor, and have them come over and give a bid on how much it will cost to repair it."
The next important step is to get that quote in writing so that you can negotiate it off the price of the home, she says. If you don't have a quote on hand, the seller may lowball your discount (because they think it should cost less to fix) or try do it themselves, but not according to code. If a discount selling price is agreed upon, then you should inform your lender to be sure your loan takes that change into account.
Hidden Cost #4 - Private Mortgage Insurance
Schacter defines private mortgage insurance (PMI) as an insurance policy paid by the borrower (you) for the lender's protection in the event that the borrower defaults on the loan. Depending on the type of loan you're using to purchase your home and the amount of cash you have for your down payment, you may or may not need PMI. According to Schacter, a well-educated and honest lender can give you an accurate PMI estimate based on your loan program, credit score, and down payment.
"FHA loans have different PMI rates versus that of a conventional loan," says Schacter. "Depending on what program you go with, your PMI amount can vary. For FHA loans, PMI is required on loans no matter what down payment you put. For conventional loans, PMI is required for any loan with less than a 20 percent down payment. If you are putting down 20 percent on a conventional loan, you would not have PMI."
Looking at the above criteria, if you now know that you will have to pay PMI, you're probably wondering how much PMI will cost. Schacter says rates for conventional loans have actually come down in recent years. "If you have fairly good credit, the rates are not that high," he says. "It is based on the payment you will be putting down, your credit score (the lower your score, the higher your PMI), and the length of the loan."
Another silver lining, says Michael, is that one day, you can get rid of your PMI payment entirely if you have a convention loan. Once the loan-to-value ratio (LTV) is at or below 80 percent, Michael says PMI is no longer required because you are no longer considered a risk of defaulting on your loan. If your home increases in value, that could help you get to the magic LTV number faster, she says, as well.
Hidden Cost #5 - Lender's Fees
If we've established anything thus far, it's that getting a mortgage can be a complicated and nuanced process. It's important to remember that a lender is performing a service for you by guiding you through the mortgage application process and approving your loan. And for that guidance and work, lenders charge a fee which can be quite pricey.
"The lender has underwriting fees, possibly processing fees, and maybe some additional costs," says Schachter. "Depending on the lender, costs can vary." As a result, Schachter recommends getting at least two estimates from different lenders to compare interest rates, fees, and closing costs.
"Depending on the loan program and interest rates, some lenders can even offer a credit towards closing costs," so be sure to inquire about that as well, says Schachter. However, while shopping around is a great, he also cautions against picking a lender solely on costs.
"Service, reputation, and recommendations always should be taken into consideration," he says.
A final way to reduce fees, he says, is by being a repeat customer, either by refinancing on your current home with your original lender (if your interest rate was negotiated when rates were sky high before) or by working with your previous mortgage lender when buying a new home.
Author: Danielle Blundell