Buying a new home can be an expensive process, and if you are not careful, you can end up paying for items you don’t need or have already paid for.
When applying for a mortgage and receiving quotes from various mortgage companies, make sure you are comparing apples to apples. You will want to find out the average closing costs in your state or county and compare them to what you are being offered. There are some costs which are fixed, such as recording fees and transfer taxes, but there are other costs you can shop around for, such as title and insurance fees. These numbers can vary quite widely depending on the lender.
If you get a quote for a fixed-rate mortgage and have it locked or remove escrow, make sure you don’t see points added to your closing statement that you didn’t agree to. Paying points may not be worth it unless you plan to keep the loan for a long time. Points do lower your interest rate and your monthly payment, but it takes some time to break even.
For example, assume the monthly payment difference between paying 1.125 in points vs. no points is $64 per month, which is $768 per year. If it costs roughly $6,000 to pay points, it will take you around eight years to break even. Paying points may make sense over the long term provided you plan on living in the home indefinitely or possibly keeping it and renting it out in the future. If you think you are going to sell and move in less than eight years, paying points is more expensive.
You probably should avoid escrow if you are disciplined about setting aside funds. Paying escrow gives the bank extra funds to hold on to for you to pay taxes and insurance when you could be earning some interest on those funds in the interim.
Check your closing statement in detail and make sure everything you have already paid is included in the calculation. You may be surprised to find that the numbers sometimes don’t add up if you plug all the line items into a spreadsheet. You may save yourself from overpaying if you happen to find a mistake. You will sometimes be asked to pay a good-faith deposit when moving forward with a lender. This deposit is usually applied toward the appraisal or other fees, so make sure you are not charged twice.
Quick mortgage checklist:
- Compare interest rates and closing costs being offered. Are points being paid? What is the percentage difference between variable rates and fixed rates?
- Make sure lenders do not tack on points after they have locked your rate (unless you intentionally want to pay points and agreed to this in advance).
- Make sure any items you have prepaid are not included again in the closing costs.
- Make sure the lender does not add escrow unless you want it.
- The buyer has the right to use their own attorney or title company – you may be able to lower title costs if you shop around.
- The lender may ask you to pay a good-faith deposit, which they usually use for appraisal, etc. Make sure you get that back as a credit.
- Check your property tax calculation against the property appraiser’s website or property tax bill.
If the home is covered by a homeowners association, read the condo documents to make sure there are no rules and restrictions that you cannot live with, such as rules against pets (if you have them) or alterations you are planning to make. Pay attention to the association’s financial statements, since this will give you clues on potential assessments, whether there are enough reserves for large repairs, or if you will have to find a lump sum when the roof needs to be replaced or the house painted. You will also want to find out if there are any outstanding lawsuits or liabilities against the association.
Inspection and property disclosure
You are not obligated to use the inspector recommended by the realtor, title company, or lender. It is usually best to shop around for someone you trust who is independent from all the other parties that have interest in the deal. Some inspectors just go through the motions and miss checking the smaller problems, which can end up costing you money later on. You want to make sure the appliances are all in working order and that you are aware of when the air conditioner and water heater, etc., were last replaced or serviced. The inspector should check all the electricals and plumbing to make sure everything is in working order. It is advisable to verify that all permits have been closed out and that new construction meets code if the previous owner made any major renovations.
Insurance is sometimes included in the mortgage estimate and is usually quoted higher than you would actually pay on your own. Shop around and don’t assume the number they state is what you will ultimately have to pay. You will need to purchase homeowners insurance prior to closing. Find out if the association covers any of the insurance costs, as this may be included in your maintenance fees. This lowers your costs of insurance, since you only have to insure contents and fixtures.
Homestead and property taxes
Property taxes are usually paid up once the sale goes through. Closing agents make estimates on the property taxes, which may be higher than the actual taxes stated on the county property appraiser’s website. Check the closing statement to make sure the taxes match what needs to be paid and that you are not overpaying. You should only be responsible for the portion of the year you own the home. For example, if you close on October 31, you should only be responsible for the days in November and December. If taxes are $8,500 for the year, then a rough calculation would be $8,500/365 = $23.28 per day x 61 days = $1,420.
Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com
For more information on financial planning visit our website at www.Evensky.com