First-time homebuyers are often shocked at the closing costs. Here's what you need to know about all these fees before you make the offer!
Real estate agents frequently encounter similar questions from first-time homebuyers. The process of buying a home can often feel quite convoluted for first-time buyers, so there are frequently questions around mortgages, down payments, and what to look for in homes. There can sometimes be a bit of a misconception for these buyers, too, that what you offer for a home is what you'll pay for it.
That is, if you see a $500,000 home, the loan amount will be $500,000. That's false. All buyers (and sellers) have to pay various closing costs, or fees, if you will, to complete the transaction.
For the Chicago area, these costs can often be 2% of the home's value. Sometimes they come in less, but not always. You'll need to pay for these costs, in addition to your down payment. Here's what you need to know about closing costs not to be shocked when you see them listed from the bank!
Homes in Chicago typically have up to ten additional fees that comprise the "closing costs" on their mortgage origination statement (HUD-1). When buying a home in The Windy City, you will have to pay at least a few of these.
When you apply for a loan and accept it, the bank may add a small closing cost to recoup the expense of obtaining your credit report. This fee is typically relatively minimal, but you will see it on your statement.
Some lenders charge an origination fee for the loan itself. This fee covers the bank's cost to review your credit, supporting documentation, have a mortgage officer work on your case, and do everything necessary to wire the money to escrow. The origination fee depends on the lender (and some may not even have one!), but typically you'll wind up paying somewhere between 0.5% and 1% of the loan's value. So, on a $500,000 loan, expect the origination fee to be somewhere between $2,500 and $5,000.
If you want the lender to pay for your home insurance and property taxes, they will establish an escrow account from which they will draw those payments. Depending on the lender and the terms, you may need to make an initial deposit into this account. Given how much property taxes and insurance can be in Chicago, expect this cost to be upwards of $1,000.
The bank needs to know that the asset underwriting this loan (i.e., the house you want to buy) is worth what you've agreed to pay for it. To figure that out, the bank will order an appraisal. This person will go out to the home, take some photos, and then compare it with others in the area. You will have to pay for this appraisal. It's typically under $500, although that number can rise if you want to buy a huge house (or one that is complex for whatever reason). If you are purchasing the home cash, you don't need to have an appraisal.
As part of the purchase process, you can make the offer contingent upon a home inspection. The bank does not require this inspection, so you can waive it if you want. However, these inspections are excellent to have as they can reveal potentially significant problems with the home before it's yours. Mold, leaks, water damage, rodents, and more are all things that home inspections can turn up, and you have the option to back out of the contract entirely if the examination reveals too many problems.
These fees are entirely optional, but if you want a licensed attorney to read over all the documents before you sign them, you can expect to pay a few hundred. If the home you're buying isn't of immense value and you're using a reasonably standard lender, you could theoretically skip this step. But, if you're purchasing an expensive home, paying the few hundred to have an attorney ensure the contract is perfect is a very wise decision! Put another way, having an attorney review the purchase agreement is always a good move. Buyers can skip this step, though, for various reasons, although it's not advisable.
Discount points are a form of pre-paid interest that lowers your interest rate on your monthly payment. Every point you buy reduces the rate by 0.125%, and it costs you 1% of the home's value at closing. To illustrate this with an example, let's say you're closing on a $500,000 loan at 3.5% with two points. To get that rate, you need to put down 2% of the loan ($10,000) at closing. If you didn't put that money down, you'd have an interest rate of 3.75%. If you can afford to pre-pay a little bit of interest, you save the life of the loan. To continue with the example above, that $10,000 payment saves you about $25,000 in interest over the life of a 30-year loan.
You'll need insurance if there are issues with your title (this insurance pays for the costs to defend your claim to the property). You'll also need to pay for the title search. The cost of this varies, but it's usually a few hundred. Sometimes, it can be a couple of thousand if the property is big enough.
This last and final fee is self-explanatory. Chicago will charge 0.75% of the home's value to complete the transfer. On a $500,000 home, that's $3,750 that you'll pay to complete the transaction. Of course, this tax only applies to residences within Chicago. If you buy elsewhere in the county, this fee does not apply (although that city might have a surcharge).
Cook County has a recording fee of $168. Much like the Chicago transfer tax, there's no way to avoid this one!
The above costs might seem like a lot, but they typically only add up to 2%-5% of the home's value. Your most significant expenses will be the points (if you buy any), the origination fee, title insurance and search, and the city of Chicago transfer tax. The rest you can negotiate, or they tend to be significantly less (e.g., a couple of hundred bucks for the appraisal).
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