Be Alert to Today's Hidden Costs of Homebuying

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By Geoff Williams

You're looking for a house and see the perfect listing. It has a big number on it. For simplicity's sake, say $200,000. If you're like most prospective homeowners, you think you will soon be talking to a lender and getting a loan for this amount. But as veteran homebuyers already know, you are going to pay much more than $200,000.

True, almost everything we buy has a hidden cost. You buy a toothbrush for a couple bucks, and since you'll have to purchase toothpaste, the ownership cost of a toothbrush is more than $2 --

"All of those costs can very scary if you've been counting your pennies to get enough money for a down payment at your closing."

especially if you throw in a toothbrush holder. Obviously, the hidden costs of buying a house are far more complex. And if you aren't prepared for them, you may come away from the experience feeling as if you've been kicked in the teeth.

So if you're thinking of buying your first house, be on the alert for these hidden costs.

• Home inspection costs. Before you close on a house, your mortgage insurer may require a home inspection, which can run several hundred dollars. But even if an inspection is not required, it's worth paying a professional to evaluate the house so you can avoid spending hundreds of thousands on a train wreck disguised as a house.
• Survey costs. Your lender may want you to have a professional survey of the property, so everyone knows exactly where your land's boundaries are. That's another several hundred bucks.
• Taxes. You probably know that you're going to be paying taxes, but it can be easy to forget that you'll likely need to prepay those taxes at closing.

"Escrow is such a confusing part of the loan process," says Jason Auerbach, divisional manager at First Choice Lending in New York City. "That really throws people for a loop. Four out of 10 times, we are having a discussion about escrow costs upfront, at the start of the lending process, and then right before closing as well."

Auerbach is referring to an escrow account, which the lender uses to pay the homeowner's non-mortgage-related property ownership expenses. If your down payment is less than 20 percent, you'll be required to use one. An escrow account allows your mortgage company to pay the taxes for you -- without it, you'll be hit with property tax bills twice a year.

At the beginning of your mortgage, it can be a shock when you're saddled with paying a couple months' worth of property taxes, maybe a year's worth of homeowner's insurance and possibly homeowner's association dues as well.

Fees. Maclyn Clouse, a finance professor at the Reiman School of Finance at the University of Denver, rattles off a list of fees you'll also pay at closing:

• Government recording charges: The cost for state and local governments to record your deed, mortgage and loan documents.
• Appraisal fee: The cost for an appraiser to decide how much your house is worth.
• Credit report fee: Your lender had to pay to get your credit report; you cover the cost.
• Title services and lender's title insurance: Fees related to your home's title.
• Flood life of the loan fee: The government tracks changes in your property's flood zone status; you'll pay a small fee.
• Tax service fee: Another pretty minor fee; This service ensures the taxes previously paid on the house are up to date.
• Lender's origination fee: This charge for processing your loan application can be pretty pricey. On a $97,000 mortgage loan with an interest rate of 3.5 percent and no points – the money you pony up if you want to lower your interest rate – Clouse says the fee would be $795.

It's worth noting that these costs aren't exactly hidden. They're routine and legal, and these days, they're more visible than in the past.

In fact, Auerbach takes issue with the phrase "hidden costs," which many homeowners rightfully associate with closing.

Referring to reforms passed in 2010 by the Department of Housing and Urban Development, Auerbach says lenders aren't allowed to impose hidden costs. When they give a buyer a Good Faith Estimate, a form that spells out the expected costs associated with your home loan, the final tally can't exceed 10 percent of the GFE.

But 10 percent of closing costs isn't insignificant. Consider that closing costs are generally between 2 to 5 percent of the home's purchase price. So if a $200,000 house has $8,000 in closing costs, an extra 10 percent would be another $800.

"All of those costs can very scary if you've been counting your pennies to get enough money for a down payment at your closing," says Dianne Saatchi, an associate broker at Saunders and Associates, which sells real estate in the Hamptons, a group of villages and hamlets on Long Island, N.Y.

Moving costs. Will you be gathering friends to help you move a hodgepodge of possessions into your home, or do you need a moving truck? Don't forget about those costs.

Total cost of ownership. Someone will have to mow the lawn with the mower you're fated to buy, or you'll hire a service. You'll also probably need furniture and maybe a major appliance, like a washing machine.

"People also need to take into consideration how much they'll need to fix up the house," Saatchi says, for those who purchase homes in less-than-premium condition. "Painting is expensive."

Just be ready for anything, OK? Saatchi says some houses come with propane or oil tanks. At the closing, she says, some buyers have been asked to reimburse the sellers for the fuel remaining in the tank.

"Years ago, that wasn't such a big deal, but at the current prices, if you have a 500 gallon tank, that could be $2,000 the homebuyer is being asked to pay," she says. "Everybody's shocked by that."

More from U.S. News:
A Step-by-Step Guide to Homebuying
8 Energy-Efficient Home Improvements That Save Money
How to Save $500 This Month

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