Do you know how much your home purchase is really going to cost you? Hopefully, you have already done some calculations to figure out what price range is within your budget. But you don’t want to forget to about the cash you’ll need up upfront to secure your new purchase.
Closing costs vary from state to state, and depending on where you live, the responsibility for who pays those costs can be different as well. In Florida, the buyer typically pays closing costs that average between three to four percent.
What all does that cover? Let’s take a look.
Third Party Fees
Sometimes when we think of a home sale, we forget that it isn’t some handshake deal between the buyer and the seller. It’s a major purchase, after all, and it has to be completed properly to avoid serious complications in the future.
In order to keep everything straight, a number of other companies (or individuals) will take a small part in the process. Luckily, most of these services will be arranged by your mortgage broker, so you don’t need to hire all these people yourself. They don’t work for free, of course, and they make up the bulk of the third party fees. Here’s what you should expect to see on your closing costs breakdown.
- Appraisal: This evaluation of your prospective home determines whether it is worth at least as much as you are paying for it. The lender in particular wants this information because they don’t want to lend a chunk of money only to get stuck with a property that is worth less than they paid for it.
- Attorney fee: This covers the cost to have an attorney review all the closing documents on your behalf.
- Home inspection: After you’ve made an offer on a property, you will need to have it inspected to ensure that it doesn’t have any major problems that could cost you (or your lender) in the future. If you have major structural issues, for example, the lender might not sign off on the loan because the repair costs are too great.
- Pest inspection: You don’t want to buy a house only to find that it is infested with termites. While the home inspector will likely notice any glaring issues, a pest inspector will do a more thorough examination. Your lender might require this inspection, particularly for an FHA loan.
- Credit report: The lender will want to verify that you credit is solid. This is why you don’t want to make an major purchases or open/close any credit accounts while you’re in the midst of the homebuying process.
- Survey fee: This pays for a surveyor to check the property lines to ensure that shared fences and other items are where they should be. You don’t want to accidentally plant in your neighbor’s yard, or vice versa.
- Title search fee: The title company will perform a thorough search to make sure this house you love actually belongs to the seller, not some distant relative or lender who placed a lien on the property in the past.
- HOA/COA fees: Depending on when you make your house or condo purchase, you might need to pay the HOA fees on a pro rata basis. For example, if you buy a condo in June and the COA fees are $1200 per year, you may need to pay $600 to cover July through December (assuming your assessment starts at the beginning of the year).
These are the major third party costs that are typical for a Florida home sale. Many of them are fixed fees, but some depend on purchase price. You can expect third party fees on a $200,000 home to be around $2500.
Unless you are paying cash for your new home, a lender will be involved. And even if you are, a lender could be involved on the seller’s end. They take much of the responsibility for the transaction, so they have plenty of accompanying fees.
While there are some differences between lenders, you should expect some, or all, of the following.
- Origination fee: This fee covers the costs of the lender to create the loan for you. Generally, this will be around one percent of your total loan.
- Prepaid interest: There is a gap between the day that you close and your first mortgage payment. The lender wants the interest to start on closing day (since that’s when they gave you the money), so they will generally ask you to pay the interest for that gap upfront.
- Private Mortgage Insurance (PMI): If you didn’t put down at least 20% for your down payment, you will have to pay for insurance to cover the lender in the case of a default. You’ll likely have to the first month of PMI on closing day.
- Discount points: If you’d like to lower your interest rate over the life of your loan, you can often pay points. Essentially, this is prepaid interest that keeps your monthly mortgage payment lower.
- Property tax: Your lender often takes care of your property taxes for you, and if so, you will pay toward that amount each month. But if the taxes are due in the next 60 days or so, you might need to pay something at closing.
- Hazard insurance: Like property taxes, this is not technically from the lender. It’s what you pay for your homeowner’s insurance. But also like property taxes, it is often paid by your lender each year. Depending on your lender and insurance company, you will likely prepay your first year at closing.
Again, this is not an extensive list, but your lender show provide a detailed breakdown of all the costs involved with closing. For a $200,000 purchase, lender fees should cost around $4,000. But that can change a lot depending on your particular circumstances, including your down payment amount.
Technically, the down payment is not a part of the closing cost package. Instead, it’s a chunk of money you are willing to pay immediately toward the home. It shows your lender that you are willing to put some skin in the game.
How much you should put down is an entire discussion by itself, but in a down payment should be at least 3.5% and preferably 20% or more. The lower limit is for FHA loans, and the 20% mark is the minimum you’ll need to avoid mortgage insurance.
For a $200,000 home, 3.5% would be $7,000. You would need $40,000 to reach the 20% minimum. Of course, the more you put down, the less you have to pay on your monthly mortgage, which will save you some interest in the long run.
Compared to the overall purchase of a house or condo, the closing costs are just a minor portion. They can seem like a lot, though, especially if you don’t know what to expect.
Also, keep in mind that in Florida, who pays for what at closing is negotiable.
If you’d like more information about what to expect during the homebuying process, take a look at our Comprehensive Real Estate Buyer’s Guide.
Marc Jablon, The Jablon Team
New Harbor Realty