A potential home buyer notices the price of a house he is very interested valued at $185,000. They do a little research and finds out if they do a 30-year mortgage with a six percent interest rate and invests a down-payment of $25,000, they figure they will pay only pay $959.28 per month on the amount borrowed, $160,000.
Unfortunately, they will pay much more up-front in closing costs, and a higher monthly payment after factoring in many other costs associated with buying and making monthly payments on a house.
What other factors go into the purchase of a house, as well as the monthly payments? First, let’s look at the closing costs, which are fees and charges other than the down payment that are owed to the lender at the time the ownership of the property is transferred. This amount ranges from two to seven percent of the mortgage loan amount ($160,000).
Note: these amounts that will be listed below are estimates and will vary depending on location, the lender and other factors.
Points
This is a fee equal to one percent of the total loan amount. These charges are paid in full when the house is bought.
Cost = ~$1,600
Attorney fees
This is a fee for an attorney to review documents as well as advise and represent buyers prior to and during closing. This cost is approximately 0.5 percent of the purchase price of the house, or a flat fee of around $500, depending on the attorney.
Cost = ~$500
Title search
The attorney or title company will conduct this search by inspecting court records and preparing a detailed, written history of property ownership. This cost will vary, but in this example, we will use $200. Cost = ~$200
Title insurance
This protects the lender’s interest if the title is later found faulty. This typically is a one-time charge of 0.2 percent of the loan amount. The cost will be $320 per policy in this example. It is also recommended that the home buyer purchase this insurance to protect their own interest, which will cost an additional $320.
Cost = ~$640 (two policies at $320 a piece)
Loan origination fee
This is a fee the lender may charge at closing to process the loan, which will cost about half of a point. Cost = ~$800
Credit reports
These reports are required before a home buyer can obtain a loan. The price of this could be around the range of $75.
Cost = ~$75
Home inspection
This cost is for the inspection of the house to ensure it is physically sound and that all operating systems are in proper order.
Cost = ~$400.
Deed recording fees
This fee is for the transfer of ownership documents in the county courthouse.
Cost = ~$200.
Appraisal fee
An appraisal may be required to obtain a professionally prepared estimate of the fair market value of the property by an objective party.
Cost = ~$250
Termite and radon inspection
This inspection may or may not be required depending on certain state or local laws, but even if it is not required, it may be a good idea to get anyway.
Cost = ~$130
Lot survey fee
Sometimes required to certify specific boundaries of the lot or property.
Cost = ~$100
Pro-rata interest
May be required if closing does not occur on the due date of the mortgage payment and interest will start to occur before the first payment is due. For this example, we will use $435.
Cost = ~$435
Home title transfer fee
Various communities may charge this fee, which is just a tax imposed to support community services such as police, fire and schools. Fees vary depending on location.
Cost = ~$1,180
Notary fee
This may be charged for the services of those people that are legally qualified to certify signatures.
Cost = ~$150
Before calculating the closing (up-front) costs, let’s look at the monthly payments. With a loan of $160,000 at six percent on a 30-year mortgage, the monthly payments will be $959.28. This amount only considers the principle and interest owed on the house. There are more factors to consider when figuring out the monthly costs of a house. Here are the other costs that could be included.
Mortgage insurance
This is required if the home buyer is unable to put down 20-30 percent on a house (generally closer to 20 percent). With this the lender is assured payment of the loan balance if the home were later foreclosed for default and sold for less than the amount owed. This cost will range from 0.25-2.25 percent and will depend on the degree to which the LTV (loan-to-value) ratio exceeds the lender-desired percentage.
The LTV in this example is 86.5 percent (160,000/185,000) and for this example the insurance premium will be 0.4 percent which will cost $640 per year or $53.33 per month.
Tip: It is a good idea to have 20 percent or more to put down on a house to avoid this cost.
Warranty insurance
Warranty insurance operates like a service contract that is generally good for one year and helps with certain house repairs. This cost will vary depending on what the home buyer wants for the house. For this example, we will use $30 per month.
Property taxes
These are taxes paid to local governments annually and will range from one to four percent of the value of the house. In this example the total property tax will be $2,160, but this amount will vary. The monthly amount to be paid is $180.
Homeowner’s insurance
Required by most lenders, this insures the house itself as well as contents in the house in case of a fire or other calamities. As with other expenses, this will vary depending on the coverage a person wants. For this example, $1,200 will be the yearly cost. Something to note is on the closing day it is required to pay ½ year’s premium ($600) so there will be sufficient funds in the account to pay the next year’s full premium in six months when it is due. The monthly payment will be $100.
Finally, look at the exact amount due at closing for this house, as well as the monthly payments. The closing costs on this $185,000 home with a 30-year mortgage of $160,000 at six percent will be $32,295. The monthly payments will be $1,332.61.
I hope this information will come in handy for people looking to buy a house in the future. It is important to understand the costs associated with a house so that when someone purchases a house, they know exactly how much money they need and are not surprised with the cost at closing and the monthly payments.
I encourage everyone that has taken the time to read this to do more research before buying a house. Find out what the property taxes will be in your area, figure out how much money can be comfortably spent monthly on a house, and so on. Buying a house is most likely going to be the biggest purchase a person will make. Be sure to be knowledgeable and prepared for this purchase when the time comes.
Nathan Cook can be reached at [email protected]