What are Prepaid Costs When Buying a Home? [Real Estate Insider]
Buying a home is more expensive than you might think. The largest cost you hear about is the down payment, but there are several other expenses that add up to quite a bit more. From taxes to insurance and fees, here are some of the prepaid costs you can expect to owe at or before closing day.
Pre-Paid Costs for Buying a Home
A mortgage originator will typically require a year's worth of mortgage insurance paid at closing. The premium is determined at a yearly rate, but most lenders will allow you to incorporate that payment into your monthly mortgage bill.
The creditor adds on the interest between the closing date and the amount due at your first payment at the end of the first full month. For example, if you close on the 15th of the month, you pre-pay the interest through the 30th (or 31st) at closing. Then, your next payment will include an entire month's worth of interest. Most people try to close at the end of the month to reduce the amount spent on interest at closing. However, there are some benefits to closing near the beginning of a month. Most lenders are busy at the end of the month, so if you close in the beginning and something goes wrong, the lenders might have more time and resources to solve the issue.
The buyer typically pays the remainder of the property taxes due that year at closing. So, a purchase earlier in the year may have to front more cash to cover the gap. Vice versa for a late-year purchase. However, this portion is negotiable depending on how the market is responding. Some sellers will offer to cover a percentage of the taxes to attract a potential buyer.
Someone will need to collect money when you make an offer on the house to prove you're serious about buying the home. Some real estate brokerages collect the earnest money shortly after you make the offer. Sometimes, they'll have you send it directly to the title company to hold in escrow. Regardless, your real estate agent should know where to take the money and how much you'll need send.
The amount of earnest money typically depends on the size of the purchase. Most contracts require 1%-3% of the total value. For example, if you make an offer for $200,000, you can expect the earnest money due to be around $2,000. This check will be contributed to your down payment at closing, but it's helpful to know that you'll need to have this money accounted for when you make an offer.
The biggest expense when buying a house is the down payment. Most lenders require at least 3.5% of the total loan up-front. This would be the case for an FHA mortgage. A conventional mortgage usually requires close to 5% with a good credit score. Some speciality loans, such as VA or USDA loans, might have 0% down options, but you typically have to pay a small percentage of the mortgage at closing.
There are down payment assistance programs available to most home buyers who make less than the median income in their area. If you think you might struggle to save enough money for the required down payment, talk to your trusted lender to see what programs they offer.
Mortgage Fees and Closing Costs
Mortgage Origination Fees
The mortgage originator charges a fee for processing the loan. All of the work they put into collecting paperwork and setting up the mortgage goes into the total costs due at closing.
Title Fees and Insurance
The title company is responsible for providing information on the property and making sure there aren't any legal issues before the transaction occurs. Most title companies require the buyer to purchase title insurance to protect the buyer and the title company from legal action if an issue is discovered after the deal closes.
Sales Taxes and Fees
Federal, state, and local governments play a role in such a large exchange of property. As a result, there are sales taxes involved because the transaction is taking place between two parties. For example, most states charge between 2-5% at the state level, and local governments can add to that if desired. There may also be a local ordinance that a city or county employee inspects the property prior to change in ownership.
Most mortgage companies will require an appraisal for the property for a few reasons. First, they want to make sure the amount of the loan would be protected and they could resell the property for a similar price if the loan is defaulted. Also, it provides valuable information about the property for the buyer, so they have a full understanding of the property they're purchasing.
The average appraisal costs around $500. Depending on the area and demand for appraisals, it can range from $300 to $800 in the very expensive areas. The buyer is responsible for purchasing the appraisal, and the results will be available for review before the closing date.
Another expense that is meant to protect the buyer is a buyer's inspection. Private inspection companies will send out a professional to examine the property and look for any obvious or potential issues. The price of an inspection depends on the size of the property since the inspector is responsible for examining every inch. A standard inspection will cost $300-$400, and there are add-ons based on the situation. Most inspectors will recommend having a sewer professional examine the plumbing, which will cost a bit more. You can also request special inspections/treatments for termites, mold, and radon. Any of these additional services will cost more, and your inspector will tell you if they think it is necessary.
Most real estate agents will recommend the buyer have a survey done on the property after making an offer. Surveys mark off the property lines and tell you if there are any potential encroachments or easements on the property. For example, most utility companies have an easement to enter your property to "read the meter" or perform routine maintenance.
A survey will also map out any unusual or unique attributes on the property. For example, some people own the road in front of their property and are responsible for maintenance. It could also reveal improvements done on the property over time and give dimension of different structures. A survey can cost anywhere from $150 for a basic drawing, or closer to $500 for a full-fledged service where they mark the boundaries and examine the structures. Talk to your real estate agent about what they think is necessary for your circumstances.
In rare circumstances, your lender might require repairs on the property before they fund the loan. If there are structural issues or hazardous conditions such as mold or radon, they can withhold the mortgage until the problems are resolved. Any repairs will fall on the responsibility of the buyer unless they can negotiate it into the contract with the seller. Beware of possible warning signs and ask your inspector to emphasize any structural or hazardous problems when they're examining the home.
Remodeling Projects With the Highest ROI
With the housing market booming as it is right now, it’s important to consider investing in property to turn around and sell for profit. One way you can do that is by purchasing homes that can use some updates but utilizing the remodeling options that will have the best return on your investment.
That is exactly what you’ll find here. The list below goes into detail about several remodeling options that are not only great for homes but also for your ROI. When you purchase a home to sell, make sure to consider these options below to help you get the most out of your purchase and resell. You’ll be glad you did when you see how well it works out and how it attracts buyers to the home.
There are numerous house siding options to choose from that offer low maintenance, durability, and appeal to the potential buyer. When you’re considering options to redo the outside, take a moment to look at the house from a variety of angles. The street view, in the driveway, and even the back of the home help you to get the full picture. You want to choose something that is not only durable and low-maintenance but also offers curb appeal and value.
Some of those options that do just that include:
- Fiber cement siding
- Stone Veneer
One of the most popular options is fiber cement siding. Not only is this a low-maintenance option, it also gives you the most variety in the way the home looks as well. It’s a great choice to get a huge ROI.
New Garage Door
One vital part of the home is the garage area. When the door doesn’t work properly or looks run down, it can be a detriment to the resale value. It’s easy to add a new door and get a great ROI. People want the garage of the home to work properly and protect their items that are stored there. When it comes to the cost of a garage door, this is actually a great way to invest into the home and get a return. You can easily add a new door to update the look of the residence and offer security to the new buyers.
One item in the home that may need to receive some TLC is the basement area. Is the basement in the property heated or closed in for use? By taking time to remodel the basement into a climate-controlled space, you can increase the square footage that the home provides. Providing heating for basements is easy to do with radiant floor heating. This allows you to heat the area without having to change anything in the current HVAC system you may already have.
This type of heating allows efficiency, durability, and comfort all at the same time. You’re sure to love the ROI you’ll receive from this addition and the increase in space.
Take a look at the flooring in the home. Does it look worn out or old? Consider replacing it with faux wood flooring to help with the ROI of the property. There are so many faux wood options out there that provide a classic elegance to the home without all the maintenance needed in real wood flooring. You can choose from a variety of styles and types, such as laminate wood, to help update the inside of the home. This is a huge appeal to those who are looking to buy which will help you to sell the home quicker once completed.
These seemingly simple updates can help make a huge difference in the return you receive on your property investments. By installing these along the way, you can turn around and resale the home for a profit larger than you might have first thought. These durable renovation options help you to add value and appeal to potential buyers down the road.
Andrea Erickson is a contributor to Innovative Building Materials. She is a blogger and content writer for the real estate industry. Andrea is focused on helping fellow homeowners, contractors, and architects discover materials and methods of construction that increase property value, maximize energy savings, and turn houses into homes.
HomeTraq Joins National Fintech Accelerator
HomeTraq joins nationally recognized fintech and insurtech accelerator program, RevTech Labs, for their Fall Cohort. They are joined by seven other startups from around the world.
The eight startups making up the class represent a range of solutions across both the financial and insurance industries. The RevTech Labs team connected with close to 4,000 companies from around the world, narrowing the numbers down to 61 through an internal screening process and selecting only eight final companies after hosting a Selection Week with program partners and sponsors.
The accelerator program provides each startup founder with intensive mentorship from leading bank executives, business development professionals, attorneys and venture capitalists.
For the fall, RevTech Labs is offering a hybrid program to provide both value and flexibility to startup Founders. “All our advisory board, task force meetings and curriculum sessions will continue to be hosted virtually through Zoom,” says Jasmine Boyce, RevTech Labs Program Manager. “We intend on facilitating an in-person roadshow to New York for Fintech Week and other in-person opportunities to engage our Founders. With the recent spike in COVID, we will continue to monitor the CDC guidelines in order to make the safest and most strategic decision for our upcoming cohort.”
HomeTraq is excited, and honored, to be a part of this cohort to continue serving consumers and growing socially responsible real estate.