You’ve decided you want to buy a house. It’s one of the largest purchases you’ll probably make. You know you have expenses but you don’t completely know what they are other then you have a down payment and the balance that’s due when you close. Many buyers have no clue what their costs are even if they’ve already purchased a home in the past. In case you’re wondering, here is how it all breaks down:
When you find it, the "perfect" house you want to buy in (North Central Phoenix, Arcadia Lite, McCormick Ranch, Desert Ridge, etc.) costs $500,000. It fits your budget and you’re ready to pull the trigger. The handy little mortgage calculator app you spend lots of time with during breaks and lunch (and when you're bored) will tell you what you can expect to pay monthly AFTER you close, but it won’t tell you what your costs are to get into the house. If you’re buying the house with cash, the costs are a little lower, but there are still costs.
When you make your purchase offer, the math on the contract looks like this:
- Purchase price: $500,000
- Earnest deposit: $7,500- the amount you deposit at escrow in good faith to the seller; usually 1-2% of the offer price; it will count toward your final balance due at close of escrow.
- Balance due: $92,500 down payment towards the purchase; $400,000 New Financing (you’re putting 20% down)
- Close of escrow is 6/2/16
The seller accepts your offer and BINGO! You've got a house! Now what?? You deposit your $7,500 with the title company 24 hours later.
And then... You need to inspect the house to know what you’re getting. Your house is about 3,000SF. You’ll want a general home inspection & a termite inspection at a minimum. The general inspection shows you may have a blockage in the plumbing line or it's old and you want to make sure that the pipes aren't shot. You schedule a plumber to check it out. You pay for your appraisal. Let's stop and tally up these costs:
|Plumbing Scope Inspection
|Spent on Inspections
You go through your inspections. Everything checks out okay and you still want to buy the house. You’re getting close to the close of escrow. At some point, your lender or agent will give you an estimate of your closing figures to know what you still owe before you can close on the purchase of this home. You have some more costs: (detailed here on an estimate from First American Title)
- Your title/escrow/loan costs are calculated- $14,730.17
- Add your total down payment- $100,000
- Subtract your earnest deposit (money already paid)- $7,500
- Your total “Cash to Close” is $112,480.68
If you want to know your total out of pocket cost that you'll pay with your down payment, it looks like this:
|Settlement or “Closing Costs”
|Total out of pocket costs
Did you wonder what in the world cost you almost $16,000?? Let's look a little closer...
Keep in mind, the fees that are "paid in advance" are essentially costs that are paid up front. When you close on the 2nd day of the month, you're essentially paying for an entire month of mortgage interest up front. Your mortgage payment now won't be due until 8/1/16 because we pay mortgages in arrears. If you don't want to pay so many pre-paid costs at closing, close as close to you can to the last business day of the month.
The "reserves deposited with lender" are an account set up so that as your taxes and/or insurance fluctuate, there's never a risk to the bank of being short and having a lapse of coverage. If you refinance or sell your home, the bank can't keep this money. It's YOURS and they have to give back any balance that remains after the account closes. Note: these 2 sections alone add up to almost $4,300!
The most important thing to know is that you can SAVE… These are the fees to watch from the time you start the loan process, not once you find the perfect house. Many can be shopped, are negotiable or avoidable. I personally don't care to pay "loan origination" fees (almost $5,100 here!). You can drop it by paying a higher rate or by finding a better loan program all together.
You can skip all the HOA fees simply by buying a home that is not part of an association. The key is to know what your costs are up front and start to think about how you're going to pay them, or if you are uncomfortable with them (and/or like to spend wisely), you can start this process before you go on the journey... Knowledge is power!