Buying Property – Buying a house means a lot of additional costs. We explain which hidden fees you have to pay, how much they are, and what to look out for when buying a home, we explain here. We give a detailed overview and how-to guide on the additional fees and extra costs that you pay when buying real estate. Investing in real estate includes all additional fees and closing costs such as broker fees or agent commissions, title search fees, mortgage insurances, discount points, and the list goes on. Who pays additional costs, everything you need to know, and more is explained below.
Additional Fees When Buying a House?
Everyone knows that you will pay money to another homeowner when you purchase your house, and for a long time as part of your mortgage interest. You will likely be aware that there are some fees that you will pay to a realtor in case you have hired one. Yet there’s many additional fees you can expect on top of that. In general, a rough estimate is that these costs are usually between 3 and 6 percent of the total purchase price of the home.
- Additional 3-6% of total purchase price
That means a $1 mil. home can incur $60.000 additional costs on top of the purchasing price.
$1 mil. House = $60.000 Additional Costs
People like to call all these costs closing costs, yet taken strictly, closing costs are all costs which occur at a point of sale of real estate, which are not the basic value of the real estate. This does not include e.g. furnishings or mortgage insurances though. Below all additional closing costs as well as additional fees which you may incur when buying a home.
All Fees – List
Below we shed some light on what the fees are which a buyer will have to deal with, who pays these, and why these are paid. Here we list the most important ones:
Earnest Money – Real Estate Deposit
The first expense you will incur when buying a home is called “earnest money”. It is a form of downpayment, a deposit paid by a future buyer which demonstrates the seriousness of his or her intentions to purchase a property. It is usually paid to a broker or agent, and held in an escrow account until the purchase is completed. It is later used to pay for the down payment or closing costs.
That is, unless the deal fails and it is found to be your failt. If this is not the case, and the deal falls through for reasons out of the buyer’s control, he or she will be refunded the money. Typical ‘earnest money’ deposits in the USA range from $500 to $2,000.
- Between $500 and $2,000
Down Payment – Beginning Mortgage
Everyone’s heard of down payments, and they’re vital to understand. A down payment is a portion of the total price of the home which you pay at the point of sale. As most people cannot pay the full sum of the real estate at the point of sale. It typically works as follows: an individual pays a downpayment to the seller of a piece of real estate. A financial institution, such as a bank, will pay the seller the remaining amount, and receive scheduled payments from the buyer. These scheduled payments form part of a mortgage, read more in our article
How much is a Down Payment?
In the U.S., the rates vary, but the typical rate is 20%, with 5% or less being rare, but still possible. The higher this percentage is, the less an individual is typically going to borrow from the bank, and therefore the lower the interest rates will be on the money needed to pay back. Additionally, the more that is paid, the lower the amount on which interest is collected. E.g. if the rate is 20%, you pay less if this is 20% of $200.000 than if it is 20% of $800.000.
- 5%-20% of Purchase Price
Taxes you Have to Pay Buying Real Estate
There are a few taxes which you need to pay when purchasing a home. These include mortgage taxes, property taxes, and transfer taxes. These are not universal across states, and need to be regarded as a critical part of the additional costs you pay when buying a home. We have a full article on the matter giving simple details
Mortgage Insurance – Real Estate Safety Net
Mortgage insurance, not to be confused with mortgage tax, is an insurance on being able to pay your mortgage. Typically this is only required if you make a down payment less than 20% of the original purchase price. Also called private mortgage insurance or mortgage insurance premium (the same thing, but when you receive a mortgage through the Federal Housing Authority). Additionally, those receiving a loan over the department of veteran affairs are not required to pay mortgage insurance of any kind.
How much is Mortgage Insurance?
The rates of mortgage insurance are typically between 0.55% to 2.25%. This percentage is calculated as a proportion of your loan. For example, a loan totalling 2 mil. with a mortgage insurance rate of 2% will be $40.000. Additionally, these are typically paid annually.
- 0.55% to 2.25% of total Mortgage
Furnishing – Critically Underestimated
Actually putting your furniture is an often underestimated part of buying a new house. Although irrelevant for those merely seeking to spread investments, for home owners, these can be substantial sums. The costs of moving into a new house can be on average up to $35.000. Moving costs on average between $1.100-$5.630 for the average homeowner, and for those buying properties in the millions, this sum is substantially larger. These include a thorough professional cleaning of the new house, hiring movers, which can costs up to 50$/hour adding up to thousands. Then supplies to move such as a blankets, or paint to paint walls, as well as hired painters. The list goes on.
- Up to $35.000
For property investors looking to rent out their property, even more significant costs can be expected. With sums of $10.000 to be expected for an unfurnished house, homebuyers often do not calculate this into their expected costs.
Discount Points: How to Reduce your Mortgage Payment
Discount points are also called mortgage points, upfront points, or just points. These are not mandatory, but if paid offer considerable advantages, given that there is not a low loan rate. The buyer pays a certain amount to the seller, which then enables the buyer to lower the interest rate on their mortgage. These can be used similarly on conventional or government loans. If you invest in one discount point, you are able to reduce your interest rate by 1%.
- 1 discount point = 1% less interest
When to Buy Discount Points
It is advantageous for a buyer to invest in discount points when two factors come true
- The buyer intends to own the property for a long time, which means that the interest will be paid for a long time. A discount point would then mean leass dollars paid each month, and over many years this would be worth it.
- If you plan on paying your mortgaeg off in the designated time period or longer. For persons who intend to pay an e.g. 10 year mortgage off in 5 years, a discount point would be worth it.
What is an Escrow Fee?
This is a fee which is paid to the title company, escrow company, attorney, etc. who helped the buyer close the sale. Like most other closing costs, these are a percentage of the sales price. Often teh value of which is split between the buyer and the seller.
This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home, but it is paid to the party who handles the closing: the title company, escrow company or an attorney, depending on state law.
Title Search Fee – Paid to Title Company
The title search fee is another closing cost. It pays for the work which the title company (an organisation which typically the buyer has hired) does in ensuring that there are no issues in ownership or past disputes. This is an aspect of closing costs in which it is quite simple to reduce costs by investing time to identify high quality and low-cost companies.
Survey/Appraisal Fees – Land Inspection
You will need to be have an official and registered survey and appraisal of a property for the lender. If an existing survey of the land you wish to purchase cannot be procured, a new survey must be carried out to determine the exact boundaries of the land. These usually cost about $500. For the appraisal, you pay a certified appraiser to determine the value of the house. Most lenders require this, this usually costs between $300 and $400.
- Between $300-$400
Property Tax – Pro Rata at Purchase
Property taxes must be paid pro rata at the point of sale. This means it is included in closing costs. For a full overview about this and other taxes, such as the recording tax (also called recording fee or notarization fee) refer to the full article
Origination Fee/Loan Origination Fee
Part of the mortgage closing costs, this fee covers administrative costs for processing a loan, and is usually 1% of the loan amount. Some lenders do not charge this, and instead have a higher interest rate. It is important to know that, often, these fees can be itemized in your final statement.
- Cost about 1%
Homeowners Insurance – Extra Security for Home
Just like with property taxes, when buying a home, you are required to pay a pro-rated share of the homeowners insurance. That means you need to pay ahead for a given time period. This time period is generally one year. Because you pay the insurance premium, the cost depends on the insurance of the house
- One year Insurance Premium
Attorney Fees – Should I get an Attorney?
These won’t be necessary everywhere, or with every purchase. Some states require an attorney to oversee the purchase of the house, and in some situations the buyer may want an attorney for other reasons. These attorneys take fees of course, and when purchasing a property, you will need to pay them. Attorneys are actually mandatory when buying property in New York.
Title Insurance – Protecting Against Claims
Title insurance is intended to protect both the lender and buyer from claims. These claims may be against the house in the case of the lender, and for the buyer prootection against past contractors making claims.
Lender’s Title Insurance
The lender title insurance is a one time fee paid at time of closing. It is paid to the title company, to protect in the case of an ownership dispute, e.g. when a lien arises that was not identified in the title search. This fee is usually betweeen 0.5 to 1% of the loan amount
- One-time fee, up to 1% of loan amount
Owner’s Title Insurance
This is an optional fee. Although you may come to regret it heavily in the case that someone does challenge the ownership. Therefore, while it is not mandatory, it is done by almost everyone, and highly recommended in any case.
Broker Fees – Commissions for Real Estate Sale
Broker fees are probably the first thing people think of when thinking about closing costs. These are also called agent comissions or real estate commissions. These are often paid by the seller, but are also usually part of the negotiations, and in a sense therefore also paid by the buyer. They are the fees which are paid to the brokers of a real estate purchase. These brokers are usually the listing agent (i.e. the seller’s agent who offers the property) and the buyer’s agent (who finds the property for the buyer, organizes, etc.). The fee is usually between 5-6% of the purchase price, meaning an additional cost of up to $60.000 if you are buying a property worth $1 mil.
- 5-6% of Purchase Price