Closing costs on a home involve more than just the title transfer fees at the end of the purchase. Most first-time home buyers are quite surprised to find that there are many more expenses associated with buying a house than they initially thought. While you could certainly skip out on some of these costs, it would be ill-advised, since it could negatively impact your home-buying and home-ownership experience. Here are some of those closing costs you should seriously consider setting extra money aside to cover.
Pay for a Title Search
A title search researches the property to make sure the property is not in anyone else’s name but the name of the person who is selling the property to you. There’s a waiting period to be observed if the property is willed to someone who hasn’t stepped forth to claim the property. These issues and a few less common ones become apparent when a title search occurs. If the title search comes back free and clear, you can rest easy knowing that the property is safe to purchase and will be yours without any future legal arguments.
Pay for a Home Inspection BEFORE the Purchase is Final
Some people skip this step and deeply regret it later. Why? Because a home inspection can uncover serious structural issues and mechanical problems that would allow you to either back out of the sale or modify the terms of the deal so that you get a home that is its best condition before you purchase.
For example, if the home inspector discovers that the roof is about to cave in, the furnace needs to be replaced, and the water heater is about to go, these things could cost you thousands of dollars more. You could back out of the sale, offer to buy the house minus the expense to fix and replace these things, or offer to purchase the home at the owner’s full asking price IF the owner fixes and replaces everything BEFORE the sale is complete. This saves you thousands of dollars in surprise repairs, and the cost of a home inspection is a drop in the bucket by comparison.
Open an Escrow Account
Most homebuyers think that the real estate agent will just manage the transfer of funds via a certified check, but honestly, there is a lot that could go wrong. It is best to open an escrow account for your closing costs and start making deposits into it right away. Having an escrow account protects your interests and the seller’s interests as well.
With an escrow account, every time a payment is required for a closing cost fee, it’s drawn from the escrow account, and the escrow company manages the process. The escrow company does charge a fee for this, and you must be vigilant as some escrow companies will attempt to charge “junk fees.” Stand your ground and only pay the fees that apply to the activities you did on the account.
Budget in Advance
Budget in advance for all your closing costs. It is a fair estimate that you will need somewhere between $5,000 and $15,000 for closing costs. The total costs depend on the size of the home, the property taxes, whether the seller has already paid this year’s taxes, whether or not you need to purchase appliances for the home, and all of the related closing and escrow fees mentioned. The total may seem like a shocking amount, given that you just spent years trying to scrape together a down payment to get a mortgage, but closing costs are something few people discuss. However, there is a silver lining. You can roll some of your closing costs into the amount you borrow for your mortgage if you borrow the full amount you have been approved for but buy less house. It is something to think about if you know you cannot come up with the closing costs.
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