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Hidden Costs to Buying

Are you aware of the hidden costs to buying a home? We all hear that owning a home is a smart financial move and equity in a home represents one of the owner’s largest source of personal wealth.  However, there’s much more to the picture than just building equity.  There are hidden costs associated with the purchase of a home, that you’ll need to offset via appreciation or paid the principle before your in the net positive for equity.  For those of you new to the buying process, it is imperative to understand what these costs are at the onset.

These costs include:

  • Commissions
    • It is most common for sellers to cover the cost of broker commissions, so this is usually covered.  However, certain sellers may refrain from offering a commission to a cooperating buyer broker.  In this case, the buyer broker will expect that the buyer pay her commission.
  • Closing Costs
    • Closing costs can equate to about 2% of the sales price.  This includes title work, transfer fees, local government taxes,  lender fees, etc.
  • Title Insurance
    • Title insurance is often covered by the seller.  However, all terms in a sale are negotiable and there are times where the buyer will have to pay for the title insurance policy.  The cost of this is dependent on the sale price.
  • Property Insurance and Tax Escrow Funding
    • If you’re wrapping your property insurance and taxes into a mortgage escrow account, the lender will likely require several months of advance payment at the time of closing.
  • Mortgage Insurance Premiums
    • If you’re lender requires mortgage insurance, they will require prepayment of several months at closing.
  • Lender Application Fee
    • This will vary from lender to lender.
  • Appraisal Fee
    • This will cost about $400 to $500
  • Inspection Fees
    • This will depend on the home and its condition.  Typically they will amount to a few hundred or less but can exceed that for unique circumstances.

Understanding these hidden costs to buying will allow you to budget the additional cash to close required in addition to the down payment.  Most of these expenses are sunk costs and will not be recouped.  Therefore, your newly purchased home will need to appreciate to break even if you were to unexpectedly have a need to sell your home.

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