First time homebuyers think if they have 20% for a down payment they can afford a house. In most situations, they absolutely can but there are additional costs outside just 20% of your purchase price. I tell all of my buyers to expect to pay 2% more on top of your purchase price. Two percent doesn;t sound like a lot in a percentage standpoint but $10,000 is unexpected costs is a lot of money. For condominiums, the number is a little higher and I’ll tell you why below.
Single Family Residences and Duplex Condos
When it comes to closing costs on a single family or duplex condo, the fees are pretty simple.
If you are getting a mortgage, you are going to pay 1% origination fee. This the cost of getting a mortgage other than an appraisal fee you will pay before closing. If you plan on paying cash, then you wouldn’t have this cost! But we know that isn’t everybody. You will also pre-pay some of the mortgage interest from settlement day until your first mortgage payment is due.
On top of your mortgage costs, you are going to pre-pay one quarter of the property taxes. This prepayment goes to your mortgage company so they can pay the taxes for you. They keep this 3 months of taxes in case the taxes increase next year, they always have a little backup of reserves.
Before settlement, you also have to pre-pay your homeowner insurance for the full year. This isn’t included with my 2% estimate of closing costs because it is not included in the actual settlement sheet, but as a buyer, you should be prepared for this cost.
The remaining fees will come from the title company. They charge a settlement fee for both parties and a buyer will pay for their due diligence to make sure you are purchasing a home clear of liens or judgements. This is done through the county by doing title searches which cost money. Once the home is cleared of defects, then a deed is prepared for you as the new homeowner. These costs can be between $950-1200.
Lastly calculated is title and lender’s insurance. Title insurance(about .5%) protects you as the buyer should any liens or defects un-surface after your purchase. Lender’s insurance (about .1%) protects the home of any judgements. It’s the banks way of protecting their loan on the home.
So in total, the settlement sheet will look like this:
Mortgage Origination Fee (1% of mortgage amount)
Pre-pay Taxes (3 months of taxes)
Settlement Costs of title agency ($950-1200)
Lender’s title insurance (.5% of mortgage amount)
Title Insurance (.1% of purchase price)
If you plan to purchase a home for $750,000. Your down payment would be $150,000. Mortgage amount of $600,000. You closings costs, would be:
Origination Fee ($6,000)
Pre-Pay Taxes ($1,500) estimating $6,000/year
Settlement fees of $1000
Lenders Insurance of $3,000
Owner’s Title Insurance of $750
Totaling about $12,250 or 1.63% of purchase price. Therefore I tell my clients to budget for 2% just in case there are additional costs. I do tend to overestimate when it comes to costs (always plan for the worst then make sure it doesn’t happen).
Condominium Buildings
If you plan on purchasing in a condominium building, the costs are almost identical plus one additional fee. When you join an HOA, there is almost always a fee to join the association. They sometimes call it “capital contribution” or “Welcome Fee”. Most buildings will ask for a one time joining cost of 2-3 months the HOA fee. So if you are purchasing a condo with a monthly HOA of $450, you may see a HOA charge of $1350 on the settlement sheet, plus a pro-rated amount for the partial month depending on your settlement date.