Eric Tyson - Home Buying Kit For Dummies

Legal fees: These fees range anywhere from nothing to hundreds of dollars. In some Eastern states, lawyers are routinely involved in real estate purchases. In most states, however, lawyers aren’t needed for home purchases as long as the real estate agents use standard, fill-in-the-blank contracts. Such contracts have the advance input and blessing of the legal eagles.

Inspections: Inspection fees can run from $200 to $1,000 (depending on the property’s size and the scope of the inspection). As we explain in Chapter 13, you should never, ever consider buying a home without inspecting it. Because you’re likely not a home-inspection expert, you benefit from hiring someone who inspects property as a full-time job. Sometimes you simply pay these costs directly; other times you pay these costs at closing.

Private mortgage insurance (PMI): Should you need it, this insurance can cost you several hundred dollars — or more — annually. As we explain in the next section, if you put less than 20 percent down on a home, some mortgage lenders require that you take out private mortgage insurance. This type of insurance protects the lender in the event that you default on the loan. At closing, you need to pay anywhere from a couple months’ premiums to more than a year’s premium in advance. If you can, avoid this cost by making a 20 percent down payment.

Prepaid loan interest: Lenders charge up to 30 days’ interest on your loan to cover the interest that accrues from the date your loan is funded (usually, one business day before the escrow closes) up to 30 days prior to your first regularly scheduled loan payment. How much interest you actually have to pay depends on the timing of your first loan payment. If you’re smart, and we know you are, you can work out this timing with the lender so you don’t have to pay any advance loan interest. To avoid paying three useless days of interest charges, never schedule your escrow to close on a Monday. Should you close on a Monday, the lender has to put your mortgage funds into escrow the preceding Friday. As a result, you’re charged interest on your loan for Friday, Saturday, and Sunday even though you won’t own the home until escrow closes on Monday. (This little tip more than pays for this book all by itself. Don’t you feel smart now?)

Recording: The fee to record the deed and mortgage usually runs about $50.

Overnight/courier fees: These fees usually cost $50 or less. Remember the times when you sent something via the U.S. Postal Service to a destination that you could have driven to in less than a few hours, and it took them the better part of a week to get it there? Well, lenders and other players in real estate deals know that these snags can occur without warning, and because they don’t want to derail your transaction or cost themselves money, they often send stuff the fastest way they can. And why not — it’s your money!

Notary: Notary fees run from $10 to $20 per signature per buyer. At the close of escrow, you sign all sorts of important documents pledging your worldly possessions and firstborn child, should you renege on your mortgage. Therefore, you need to have your signature verified by a notary so everybody in the transaction knows that you really are who you say you are.

As you can see, closing costs can mount up in a hurry. In a typical real estate deal, closing costs total 2 to 5 percent of the property’s purchase price. Thus, you shouldn’t ignore them in figuring the amount of money you need to close the deal. Having enough to pay the down payment on your loan isn’t sufficient.

When you’re short of cash and hot to buy a home sooner rather than later, you can take out a mortgage with no out-of-pocket fees and points (see Chapter 6) and try to negotiate with the property seller to pay other closing costs (see Chapter 12). Expect to pay a higher mortgage interest rate for a low-up-front-fee loan. And all other things being equal, expect to pay a higher purchase price (with a correspondingly bigger mortgage) to entice the seller to pay your other closing costs. Also, don’t blindly accept all the closing costs come closing time. (In Chapter 14, we explain the importance of auditing your closing statement.)

Jeremy went house hunting and soon fell in love with a home. Unfortunately, after he found his dream home, he soon discovered all the loan-documentation requirements and the extra fees and penalties he would have to pay for having a small down payment. Ultimately, he couldn’t afford to buy the home that he desired because he hadn’t saved enough. “If I had known, I would have started saving much sooner — I thought that saving for the future was something you did when you turned middle-aged,” he told Eric.

We don’t want you to be surprised when you finally set out to purchase a home. That’s why now, in the comfort of your rental, commuter train, or bus (or anywhere else you may be reading this book), we’d like you to consider the following:

How much money you should save for the down payment and closing costs for the purchase of your home

Where your down-payment money is going to come from

How you should invest this money while you’re awaiting the purchase and closing

Ideally, when buying a home you should have enough money accumulated for a down payment of 20 percent of the property’s purchase price. Why 20 percent and not 10 or 15 or 25 or 30 percent? Twenty percent down is the magic number because it’s generally a big enough cushion to protect lenders from default. Suppose, for example, that a buyer puts only 10 percent down, property values drop 5 percent, and the buyer defaults on the loan. When the lender forecloses — after paying a real estate commission, transfer tax, and other expenses of sale — the lender will be in the hole. Lenders don’t like losing money. They’ve found that they’re far less likely to lose money on mortgages where the borrower has put up a down payment of at least 20 percent of the property’s value. (Unfortunately, lenders and the folks in Washington forgot this fact, which led to the late 2000s real estate market problems and high levels of foreclosures.)

If, like most people, you plan to borrow money from a bank or other mortgage lender, be aware that almost all require you to obtain (and pay for) private mortgage insurance (PMI) if your down payment is less than 20 percent of the property’s purchase price. Although PMI typically adds several hundred dollars annually to your loan’s cost, it protects the lender financially if you default. Should you buy an expensive home — into the hundreds-of-thousands-of-dollars price range — PMI can add $1,000 or more, annually, to your mortgage bill. (When you make a down payment of less than 20 percent, you can also expect worse loan terms, such as higher up-front fees and/or a higher ongoing interest rate on a mortgage.)

PMI isn’t a permanent cost. Your need for PMI vanishes when you can prove that you have at least 20 percent equity (home value minus loan balance outstanding) in the property. The 20 percent can come from loan paydown, appreciation, improvements that enhance the property’s value, or any combination thereof. Note also that to remove PMI, most mortgage lenders require that an appraisal be done — at your expense.