When purchasing your dream home, you can choose to get a mortgage loan to cover the expenses. Unfortunately, failure to adequately understand or budget for closing costs can hinder you from making a purchase comfortably on your first attempt. You will incur closing costs when refinancing or buying a new home. This piece highlights hidden closing costs in mortgages and major fees to comfortably purchase a new or recently occupied home.
Deposit Costs
In most cases, you are required to deposit within twenty-four hours of the seller accepting your offer as a show of good faith. The amount paid as a deposit is dependent on where you are making the purchase. In states like Ontario, you must pay a five percent deposit of the total purchase price.
In case the deal goes through, your deposit is credited in full and placed towards covering the home purchase. A deposit comes in handy in reducing the overall interest amount that you pay on your mortgage. It is important to note that a deposit is different from a down payment.
Home Inspection Fees
While purchasing a home, you need to seek a home inspector’s services to evade hefty repair costs after the deal is closed. Charges for a full home inspection is based on the size of your condo or house. A home inspector helps you discover issues with the property to improve your stand when negotiating the final price.
A seller can help you avoid hiring a professional home inspector by hiring one to inspect the property. To ensure that you pay for a high-quality product, you may need to get your inspector to check the floors, walls, ceilings, windows, ceilings, plumbing, and other parts of your home are in perfect condition.
Loan Origination Fees
When taking a mortgage, you must pay a loan origination fee to your lender to assess and prepare your mortgage loan. A loan origination should be paid upfront to your lender. It is essential that you add the original fee to your total cost calculations.
The amount you pay is based on your total mortgage loan and your lender. In most cases, you are required to pay between one and five percent of your mortgage’s total value to cover notary fees, preparation of documents, and lender’s attorney fees. Loan origination fees can also be referred to as the processing fee, underwriting fee, or administrative fee.
Sales Tax
When buying a home, you should pay the Harmonized Sales Tax (HST) Goods and Services Tax (GST). In areas like Quebec, you are required to pay the Provisional Sales Tax (PST) and the GST, adding up to about fifteen percent of the purchase price.
While buying a previously occupied home, you are protected from paying the sales tax. However, when buying a new home, you are qualified for the HST/GST new housing rebate. GST/HST applies to a home inspector, lawyer, real estate agent’s commission, home inspectors, and movers.
Mortgage Insurance Fees
While purchasing a new or recently occupied home, you may have to pay insurance fees like;
- Upfront Mortgage Insurance- A lender requires a borrower to pay first year’s mortgage insurance premium forthright. The amount paid as Upfront Mortgage Insurance is dependent on your lender. In some cases, a buyer is required to pay between 0.55 and 2.25 of the purchase prices.
- Mortgage Insurance Fee- While buying a home, you can get private mortgage insurance (PMI) if your down payment is below 20%. A PMI covers your lender if you default. PMI is a recurring annual fee paid upfront at closing within the first year until completion of twenty percent of the loan amount. Some lenders charge application fees for PMI, while others require a prepay for PMI in a lump sum.
- FHA, VA, and USDA fees- you are required to pay the FHA mortgage insurance premiums and an upfront of 1.75% of your loan if the Federal Housing Administration insures your loan. In case your loan is guaranteed by the Department of Veterans Affairs of the US or Department of Agriculture, you are required to pay guarantee fees. VA loan guarantee fees range from 1.25%-3.3% of your loan amount, while a USDA guarantees a 1% fee upfront.
- Homeowner’s Insurance- Most lenders require you to purchase homeowner’s insurance before or after closing the deal. In most cases, your homeowner’s insurance is rolled up in your monthly mortgage payments paid to your insurer by your lender but can go up.
How can I Reduce Closing Costs?
- Break Down the Loan Estimate Form- A lender is required to deliver the form within three days of finalizing a mortgage application. The form includes an itemized list of total costs, loan amount, interest rates, monthly payments, services you can shop for, and preferred vendors.
- Consider the Lender Fees- your lender charges loan costs for underwriting and loan origination. To avoid making hefty payments, you can ask for a discount or seek lenders willing to give a handsome discount. You can ask for loan estimate forms from different lenders before submitting your loan application.
- Understand What the Seller can Pay for- As a buyer, you are obligated to pay most of the closing costs while the seller is required to cover some costs. A seller is required to pay or contribute towards the real estate agent commissions. The loan estimate form indicates the seller credits, showing how much the seller shall contribute.
- Fold Some Costs into Your Mortgage- In case you do not have enough cash to cover closing costs, you can ask your lender about the available options to roll closing costs into your loan. It costs relatively more but can be of help when you have less cash at the time of purchase.
- Seek Grants and Other Forms of Assistance- counties, cities, and states have various financial assistance programs for eligible homebuyers. Contact relevant agencies in your municipality to get a list of updated programs for the first time and subsequent homebuyers.
Bottom Line
While buying a new or recently occupied home, you should try closing the deal as the month ends to reduce the number of days in which the per diem interest applies before your mortgage payment is due. In most cases, you can negotiate closing costs or convince your seller to help you cover the expenses. To avoid hidden closing costs in mortgages, seek different lenders.