Home Buying Fees
Interpreting these fees is challenging enough let alone trying to negotiate them. Before you can ask for concessions or pass them off the seller or broker, you need to understand them. Some small wins can have a significant long term financial impact.
The purchase price of the home is only one part of the total cost of the purchase. There are nearly an infinite amount of strings you can attach to the deal for others to absorb.
Once you understand the fees, get creative in preparing your list of strings in the negotiation with the seller and the broker. From touching up the paint, fixing a leak, adding a warranty, to reducing broker costs…everything is on the table. This is perhaps one of the most important negotiation a buyer will make in their lifetime in terms of long term financial impact.
The seller has to complete a checklist of items about the house and property. Soon after closing, verify it is accurate and if not, notify the broker and you may be able to get money back or get other compensation. Were you misled in terms of the square footage? Is there a known skyscraper under development that will soon block your ocean view? Is the previous water damage, a possible mold issue, infestation, and so on.
As a buyer you’re normally paying the pre-paid taxes that the seller has already paid. The seller gets a pro-rated refund on the taxes paid forward from the date of closing and the buyer pays the amount refunded which is usually to the next tax period. This is a logical fee but this can be another negotiable string to attach and ask the seller to pay.
This is a one-time fee paid to conduct a review of title to look for defects that are usually related to liens, encumbrances, owed taxes, and conflicting will. This protects both the buyer and the lender from past occurrences. The transaction will most likely be stalled until their is a clean title.
This fee covers the registration of the real estate transaction into public record which is typically with the county. This is another one-time fee usually paid by the buyer and usually ranges from $100-$300. This is often negotiable to an extent but as a buyer however it may be more worthwhile focusing negotiations on other more valuable fees.
The downpayment will likely be the largest fee for the buyer. Even if you finance the downpayment to meet at least 20% of the original loan amount to avoid PMI, you’ll probably still have to bring some amount to closing for a downpayment.
As a seller you’re normally you’re usually on the receiving end of getting your prepaid taxes refunded unless closing is on the exact due date of taxes or otherwise negotiated with the buyer.
If you plan to use a realtor the commission to the realtor is usually 5-6%. This is a lot of money depending on the sell price. This is negotiable and even a tenth of a percent can make a sizable difference. Just make sure you’re getting the same marketing exposure as would otherwise be expected. If you sacrifice the size of the potential buying base then that could cost in terms of time (more taxes and other issues could arise). If you’re doing an FSBO there will likely be attorney and title fees but could be lower than realtor fees.
POST SALE ISSUES – BUYER RECOURSE
If you later find conflicting evidence that doesn’t match the closing documents and checklist, you probably have a right to a discussion for compensation. For example, you find water leaks that weren’t disclosed, mold growth, termite infestation, broken windows, etc. and these issues weren’t disclosed you may have a case.
If you went the route of a Quit Claim Deed your options are limited for recourse and the due diligence becomes more important before finalizing the deal.
This calculator is designed with a lot of features that many calculators leave out. This allows you to model more scenarios to get a more complete value of your monthly obligations when buying a home.
A couple examples below show the impact of varying the downpayment but you can literally model and infinite number of scenarios here.
- Home Purchase Price goes in the ‘Home value’ field: Assume $300,000.
- Apply a downpayment of 20% for $60,000 (to avoid PMI premiums). The loan amount is assumed to be $240,000.
- APR conventional loan rate of 4.0%
- PMI rate is 1.0%
- Real Estate Taxes: $200/mo. or $2,400/yr
- Homeowners Insurance: $100/mo. or $1,200/yr
- NOTE: Assume you pay all closing costs of $3,000 at the time of closing so enter $0 in the Closing Costs field. If you roll the Closing Costs into the loan it increases the total loan amount and the 20% threshold to avoid PMI goes up and the total interest paid over the term of the loan increases. This is very important to consider because it’s like a downpayment since you either pay it upfront when closing the deal or add it to the loan amount (or negotiate to have the seller pay them or a portion of them).
The monthly payment is $1,446 which is a combination of Principal & Interest of $1,146/mo. + Taxes, Insurance, & PMI of $300/mo. (which the PMI is $0).
- Everything is the same except the downpayment is $30,000 (10% of loan amount).
The monthly payment grows substantially to $1,814/mo. which is a combination of Principal & Interest of $1,289 + Taxes, Insurance, & PMI of $525- which the PMI is $225. That means you will pay PMI fees of $225/mo. to start and it gradually does down to $200/mo. to the point you’ve paid 20% of the home purchase price ($30,000 more on principal). That’s ~$15,000 in total PMI fees! At least through 2020 the fees are tax deductible.
Be careful with amortization calculators. They usually only show Principal & Interest payments. At some point you’ll have insurance and taxes to pay too. Usually you have the option to pay insurance and taxes directly to avoid rolling them into the monthly payment with your house. Either way it still amounts to an annual obligation. Sometimes you can get a better insurance rate if pay a lump sum over a year and therefore keep it separate from your home loan.
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