When you are trying to complete a real estate transaction, you should anticipate 4 hidden expenses that are not “normal” closing costs. Normal closing costs means the money you actually bring to the closing table in order to conclude your purchase. The 4 additional hidden expenses are:
One way or another, you are going to have to whip out your checkbook, or call Uncle Bob, one more time, for some extra dough. These hidden expenses are going to fall on you like a ton of bricks, at the most in-opportune time, right when you’re trying to come up with the money for the “normal” closing costs. Let me move through these 4 hidden items as quickly as I can.
Moving cost. This expense is hard to pin down because it depends on:
It may cost thousands of dollars to move a full van of stuff from New Jersey to Sacramento, or it may cost a few bucks for some gas, a cooler of cold drinks, and a bucket of fried chicken to bribe your friends.
Fix-up cost. This, like moving cost, is highly variable. You may spend $100,000 for an extensive remodel, or $29.59 for a hose to keep the front lawn from dying before you figure out the sprinkler system. Some houses are “turn key” or “move in ready,” and you won’t have to spend much. Some houses are “fixers,” and you need expert budgeting and a lot of cash to get them up to speed.
Pre-paid property taxes and insurance. If you are getting a loan to purchase the property, and you are borrowing more than 80% of the price, the lender will probably require that your property taxes and your insurance premiums be “impounded.” That means that the taxes and insurance will be collected monthly, along with your mortgage, and paid to the tax collector and the insurance company by the lender, not you. This “impounding” is very convenient and probably a good idea for most borrowers.
But here’s the “rub.” The lender will probably collect 6 months to 1 year of the property tax, and 1 full year of the insurance premium, up front, in advance, at the time of closing. Typically this will be several thousand dollars. Surprise! But don’t get mad. This is not a “fee” you are paying to someone. You are going to have to pay these taxes and insurance anyway, sooner or later, but the lender will insist on sooner, in fact, right now, at closing, in addition to your anticipated impounds.
Moving costs, fix-up costs, prepayment of taxes and insurance. Whew. Take a deep breath . . . .
Now to the 4 “normal” closing costs. Some of these costs may be paid by you, the buyer, and some may be paid by the seller. Some may even be paid by the lender, but be sure of this, somebody is going to pay them, and it might be you, so let’s take a look at all of the normal closing costs so you are not caught un-prepared.
The normal closing costs fall into 4 broad categories:
Real estate fees or commissions. These expenses are almost always paid by the seller, so if you are the buyer, you will probably never even know about them. Yay!
Inspections. The costs and responsibilities for inspections are negotiated in the purchase agreement. I have written several articles detailing the inspection process and costs, and I’ll be glad to send you these articles. For now, let me just give you a quick snapshot, without regard to which side, buyer or seller, is paying.
The simplest inspection process will cost at least $500. From there, a more exhaustive inspection can easily reach $3,000. From $500 to $3,000.
Lender fees. Lenders, and the folks they work with, get paid, typically by you, the buyer, but not in all cases. You may be able to get the seller to pick up most, or all, of the lender fees, or you may actually get the lender to pick up some of their own costs, or you may be able to get the lender fees added into the amount you are borrowing so that you can pay the lender back during the life of the loan.
What will these lender fees include?
Lenders don’t like it when I say “junk” fees, so don’t tell them I said it. OK? These lender fees are variable, and in some cases, negotiable between you and the lender, but make no mistake, the lender is going to get paid, one way or another, and why shouldn’t they? They’re working for a living just like you are. If they don’t charge you on the front end, at the closing table, they’re going to get it on the back end, by which I mean, they’re going to fold those fees right into the loan itself.
So how much are the lender fees? Not counting “origination fees”–about $2000 on a small loan, a loan for $150,000 to $250,000.
But let’s do take a moment to glance at “origination” fees. What does that mean, “origination?” Simply put, this fee is money that you pay to “buy” the loan. Loans are not free, you know. These “origination” fees are usually expressed in “points.” A “point” is 1% of the loan amount, so 1 point on a $150,000 loan is $1,500. You may see loans advertized as a “no points” loan. Don’t believe it. The money is simply collected, over time, by making you pay a slightly higher interest rate on the loan. Or you may see “such and such an interest rate at 2 points.” This means you may get a lower interest rate, but with the lender collecting 2 points or 2% from you up front.
Now pay close attention. Here is an important concept that could save you a bundle if you calculate it correctly. You can often “buy down” the interest rate by paying extra points “up front.” If you are reasonably sure that you are going to hold on to the property for a significant length of time, then paying extra points up front in order to buy a lower interest rate, could save you many, many thousands of dollars. What does “a significant length of time” mean? That’s where the calculation comes in. We’ll need to sit down with an expert lender and crunch those numbers to find out how long you have to own the property before the lower interest rate pays for the up front points.
Finally, we come to the last of the four categories ofnormal closing costs, the title and escrow expenses. Remember, sometimes the seller pays, sometimes the buyer pays, and sometimes the expenses are split between the buyer and seller.
The total title and escrow costs on a $150,000 conventional purchase are about $2000. That’s for a conventional purchase, but, title and escrow companies charge more for foreclosures and short sales because they involve a lot of extra work. If the property is a foreclosure or short sale, the title and escrow closing costs will total about $3,000.
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