Buying a house is a significant financial decision, and many first-time homebuyers tend to overlook the additional costs that come with the process. Closing costs are the expenses a homebuyer incurs while finalizing the purchase of a home. These costs can vary depending on various factors such as location, property type, and mortgage lender. One significant component of closing costs is the budget for property taxes, legal fees, and such. In this article, we’ll discuss what these expenses are, why they matter, and how you can budget for them.
What Are Closing Costs?
Closing costs are the fees that are incurred when buying a home. These fees cover the costs associated with the transaction, such as the appraisal fee, credit report fee, title search, and inspection fee. These costs can be as high as 5% of the home’s purchase price. As a homebuyer, it is essential to factor in these costs when budgeting for your home purchase.
Types of Closing Costs
Closing costs are broken down into two categories: recurring and non-recurring costs. Recurring costs are expenses that will occur again over time, while non-recurring costs are one-time expenses.
Recurring costs include:
Property Taxes: Property taxes are taxes that are assessed by local governments and are based on the value of the property. These taxes are typically paid annually or semi-annually.
Homeowner’s Insurance: Homeowner’s insurance protects the homeowner against damage to the property or personal injury that may occur on the property.
Private Mortgage Insurance (PMI): PMI is required when the homebuyer has less than 20% equity in the home.
Non-recurring costs include:
Appraisal Fee: An appraisal is an estimate of the value of the property. This fee is typically paid by the buyer.
Credit Report Fee: This fee is charged by the lender to obtain a credit report on the borrower.
Title Search Fee: This fee is charged by the title company to ensure that there are no liens or claims against the property.
Inspection Fee: An inspection is a thorough examination of the property to identify any issues or potential problems. This fee is typically paid by the buyer.
Attorney Fees: If an attorney is needed to handle the closing, their fees will be part of the closing costs.
Why Property Taxes and Legal Fees Matter
Property taxes and legal fees are two significant components of the closing costs. Understanding the importance of these expenses can help you budget for them and avoid any surprises.
Property Taxes
Property taxes are an essential expense that homeowners should budget for, as they can add up quickly. These taxes are assessed based on the value of the property, and they can vary from one location to another. In some cases, property taxes can be as high as several thousand dollars per year. It’s essential to research the property taxes in the area where you’re looking to buy a home to ensure that you can afford them.
In some cases, property taxes are included in the monthly mortgage payment. However, this isn’t always the case. If the property taxes are not included, the homeowner will be responsible for paying them directly to the local government.
Legal Fees
Legal fees are another critical component of the closing costs. These fees can include the cost of hiring an attorney to review the purchase agreement, conduct a title search, and handle the closing. In some cases, the seller may be responsible for these fees, but more often than not, they fall on the buyer.
The legal fees associated with buying a home can vary depending on the complexity of the transaction and the location of the property. It’s important to budget for these fees, as they can add up quickly.