It’s a very exciting time, closing your first home. I remember quivering like JELL-O when I had to sign the papers for my first solo house purchase. Young and naive, I thought I had dotted all the i’s and crossed all the t’s, but I still had some surprises in store.
The costs that snuck up on me back then are still sneaking up on new home buyers today. Perhaps it’s because down payments grab all the focus. Yes, the down payment is the biggie, but you better be prepared for the other costs associated with buying a home.
Loads of folks make no provision for the $600-$900 in legal fees and the $300 or so in disbursements we have to pony up to a lawyer even though we know, at least in theory, that we’re going to need a lawyer to close on the deal. If you go with a lawyer who makes his living closing real estate transactions, chances are you’ll pay less because he’ll have streamlined the system. But don’t take my word for it. Check with your mortgage broker, friends and family for referrals.
Most people who have never bought before have no idea what the “property tax adjustment” cost is all about. It’s simple really. If you’re buying a home from George, and he’s already paid property taxes on the property for months you’ll be living in it, so you’ve got to pay George back for the money he’s already sent in. You’re responsible for the property taxes from the date you take possession, and this is calculated by the lawyer and paid back to the seller as part of the transaction.
Another cost that throws new buyers is the “interest adjustment date.” The maximum this can be is one month’s worth of interest, but most often it is less. If your mortgage is advanced (sent to the lawyer to pay to the seller) on June 14, you’ll owe interest from that date until the date your first mortgage payment comes out of the bank (likely July 1). It’s a good idea to ask your lender to calculate your interest adjustment so you know what to expect.
If you’re selling a home before your mortgage term is up for renewal, you’ll likely have to pay an interest rate penalty, sometimes called a LIC (lost interest compensation) or IRD (interest rate differential). This is the fee the lender is going to charge you for breaking the mortgage early. Hey, a deal is a deal, and if you break the deal you shouldn’t be surprised that you have to pay. Sometimes it’s three months worth of interest. Sometimes it’s much worse. If you’re selling and then buying, and planning to break an existing mortgage—as opposed to taking it with you to the new property—you better have a handle on just how much this is going to set you back.