Don’t Overlook the Hidden Costs When Buying a Home
Buyer Commissions
When buying a home, it’s crucial to understand the hidden costs involved. Previously, sellers would hire a real estate agent, known as the listing agent, and offer to share part of their commission with any agent who brought a buyer. This shared commission, called the buyer’s agent commission, meant that as a buyer, you didn’t have to pay your agent directly. Instead, the seller would cover this cost from the sale proceeds.
However, starting in July 2024, the rules are changing. Sellers will no longer be required to offer to pay the buyer’s agent’s commission. This means that if you want a buyer’s agent to assist you, you’ll need to pay their commission out of your own pocket. Although the listing agent can still choose to cover part or all of the buyer’s agent’s commission, it’s no longer mandatory. As a result, you’ll need to negotiate and agree on the commission with your agent. Understanding these hidden costs when buying a home is essential to avoid unexpected expenses.
Hidden Costs When Buying a Home
| Additional Cost | Percentage Range (% of Purchase Price) |
|---|---|
| Closing Costs | 2% – 5% |
| Property Inspection | 0.1% – 0.5% |
| Appraisal Fee | 0.2% – 0.5% |
| Loan Origination Fees | 0.5% – 1% |
| Private Mortgage Insurance (PMI) | 0.3% – 1.5% (annually, if applicable) |
| Title Insurance | 0.2% – 0.5% |
| Recording Fees | 0.1% – 0.2% |
| Attorney Fees | 0.2% – 0.5% |
| Homeowners Insurance | 0.3% – 1% (annually) |
Closing Costs
These are various fees paid at the closing of a real estate deal, involving several different parties.
- Typical Components Include:
- Loan origination fees: Charged by the lender for processing the loan.
- Appraisal fees: Paid for the lender-required appraisal to determine the property’s value.
- Title insurance: Protects against errors in the title search, ensuring no other party has claims on the property.
- Escrow fees: Paid to the party that handles the transaction and exchange of funds.
- Attorney fees: If applicable, for legal advice and document review.
Inspection Fees
Before finalizing the purchase, it’s typical to hire professionals to inspect the property for any potential issues.
- Types of Inspections:
- General home inspection: Comprehensive check of the structural integrity and mechanical systems.
- Pest inspection: Checks for signs of pest infestations, which can be critical in some regions.
Land Transfer Tax
In some locations, purchasing property triggers a land transfer tax, which is calculated as a percentage of the property price.
- Note: Not all regions have this tax, so it’s important to check local regulations.
Legal Fees
These are fees paid to lawyers or notaries involved in reviewing and finalizing the purchase documents.
- Services Include:
- Reviewing the purchase agreement
- Conducting a title search
- Ensuring that all legal and contractual conditions are met
Recording Fees
Fees for recording the deed and mortgage, which ensure that the official records reflect the new ownership and lien.
Credit Report Fees
Lenders often require a current credit report before issuing a loan. There might be a fee associated with pulling this report.
Mortgage Points or Prepaid Interest
Sometimes, buyers choose to pay points to lower their mortgage interest rate, which involves an upfront payment.
- Function: Each point typically costs 1% of the loan amount and reduces the interest rate, potentially saving money over the term of the loan.
Bank Fees
If you’re getting financing through a bank, there may be various additional fees, such as document preparation fees or wire transfer fees.
These are the primary additional fees and costs that you’ll likely encounter when buying a rental property. It’s important to budget for these expenses, as they can add up to a significant amount and impact your initial investment calculations.
