What Are Closing Costs?

There are lots of things that need to be taken into account when you are planning to buy or sell a property. One of those things is known as closing costs. It’s something that first-time buyers may not be aware is required. And seasoned buyers and sellers may not realize can vary greatly from state to state.

Closing costs come from a variety of fees and often overlooked expenses. So what are these closing costs?

There are lots of factors that need to be taken into account when it comes to closing costs. These can include inspections, loan fees, government recording charges, and title charges. These costs are generally covered by the buyer, although there are also instances in which the buyer can ask the seller to cover some part of the closing cost fees.

To help provide you with a clearer picture of closing costs, we will go into more detail.

Real Estate Closing Costs
pen and glasses on closing cost documents

Closing costs can change according to the area and the type of transaction performed. However, in general, the things that comprise closing costs are:

• The cost of conducting surveys
• Inspection services fee
• Appraisal services fee
• Title search fees
• Title insurance
• Closing service (including notary closing services)
• Courier and Funds transfer/wire fees
• Loan origination fees
• Assessments
• Payoffs of unresolved liens and taxes
• Mortgage and deed preparation costs
• Document Recording Fee (including electronic recordings, or “eRecordings”)
• Other

Buyer’s Fees

In general, the majority of the fees included in closing costs are part of the buyer’s deal. This is why buyers generally have to take responsibility for the payment of closing costs.

Closing costs vary according to the state, type of agency, and transaction. All buyers should acquire an estimate of the closing cost fees they are liable to pay to avoid surprises at the end of the deal. Lenders are required by law to give you this, also known as a GFE (good faith estimate).

Seller’s Fees

When it comes to sellers fees, they don’t have to worry about closing costs as much as the buyer. The only thing they will be required to do is take care of the loan payoff costs, agent’s commission, associated penalties, notary fees, homeowner association fees, and transfer taxes.

Payment Options

When it comes to closing costs, the majority of the fees fall upon the buyer. These are the ones who usually have to decide how to pay it. They can choose to pay it outright through wire transfer or with a cashier’s check. They can also choose to negotiate with the seller to cover some part of the costs in a sale. Also, some lenders offer loans with the closing costs rolled into the mortgage. This option will almost always cost the buyer more in the long run, as they will end up paying interest on these items.

Many buyers and sellers are confused about the closing costs and the types of fees included in them. If you face any confusion, you should never hesitate to ask your mortgage broker or your real estate agent to explain any fees to you.

Lake Home Financing and Equity: What You Need to Know

Home equity, or the difference between the value of your home and what you still owe, is a key component of your finances.

Your equity can act as a financial cushion for emergencies, or provide your family with a healthy nest egg for the future. In fact, building equity is one of the first steps to accruing wealth.

Equity is awesome, and there are a million online articles that report what it is, why it matters and how to cash in on it. However, there isn’t a lot of information about effectively building equity on lake homes, most of which are secondary homes.

Let’s take a look at some key factors that actually matter when it comes to your lake home’s equity.

Equity and Down Payments

When buying a home, the larger your down payment, the more equity you’re starting out with. Hefty down payments also ensure lower mortgage rates, which is always a plus.

Ideally, 20 percent is the golden standard, but it’s certainly not a requirement. According to Zillow’s 2017 Consumer Housing Trends Report, only a quarter of buyers pay 20 percent of their home’s price upfront.

Most lenders will accept as low as 3 percent, although it’s best to put down as much as possible. A disadvantage of smaller down payments, however, is they yield a premium–private mortgage insurance (PMI)–to cover the extra risk that lenders take.

When it comes to secondary homes, however, there are a few more factors that go into down payments and building equity.

Qualifying for a mortgage on a secondary home is exponentially harder. Lenders assume that, in the event of hard times, homeowners are more likely to default on their vacation homes than their primary residences.

This means inevitably more resistance and red tape in the home buying process.

Buyers should expect to provide at least a 20 percent down payment in the case of good credit (725 to 750, typically). For lower scores, up to 35 percent down isn’t unheard of.

Lenders take a deeper look at your debts compared to your household income, sometimes including full income and asset documentation. There are also higher interest rates and tighter guidelines on second homes.

This would explain why, in 2018, 39 percent of vacation home buyers paid cash. It’s simply easier to do so for those who have the means. And paying cash eliminates the need to build equity, since it’s already at 100 percent from the start.

However, equity in a lake home isn’t as liquid as on primary residences. Since vacation homes are seen as luxury properties and not necessities, they may take longer to sell.

This means that in the event of a financial emergency, it won’t be as easy to tap into your lake home’s equity for help.

Use Rental Income to Pay Toward Your Principal Balance

For those who are in no hurry to cash in, though, there’s a clever way to build equity faster.

In addition to a host of taxes and fees, mortgage payments also cover interest and principal balance. As in general real estate, the faster you pay off the principal balance, the faster you build equity. That’s assuming, of course, your home value stays the same or increases.

The following is an example from LendingTree.com. Let’s pretend there’s a $300,000 house–with a 30-year mortgage at a 4.5 percent interest rate–that Person A bought in March of 2018.

Below is the difference between the standard repayment schedule and how fast Person A could pay it off by putting $500 per month toward his or her principal balance.

                                                        Courtesy of LendingTree.com

As you can see, an extra $500 per month toward her loan’s principal balance saved Person A more than $107,000 in interest. It also allowed him to pay his home off nearly 12 years faster.

The good thing about owning a secondary, or vacation, home is you don’t need to pay the mortgage all by yourself.

In 2014, vacation rental owners charged an average rental rate of $1,520 per week ($217/night). That translates to an average residual annual income of $27,360 for the owners.

Using rental income to pay off your lake home’s principal balance is a smart financial move that requires minimal effort, aside from cleaning costs. Renting the property out for a few months a year means the house basically pays for itself.

When paying your mortgage, remember to specify how much you want to go toward your principal. Keep in mind to check with lenders and ensure that paying off your home faster won’t result in prepayment penalties.

Make Some Home Improvements

Making some improvements around the house not only makes it easier to sell later, but builds equity.

However, while some updates can help you, others simply cost more than they’re worth. Therefore, it’s important to consult a real estate professional before investing in home improvements.

According to Realtor.com, some common updates that show a negative return on investment include master suite, bathroom and deck additions. While these projects may be glamorous and popular, they often cost twice as much as their resale values.

Realtor.com advises “less is more”. In fact, simple tweaks like attic insulation, garage door replacement and minor kitchen remodeling offer the best returns on investment.

Landscaping, bathroom improvements and fresh coats of paint can help increase the value of your lake home, too. Sellers would benefit from energy-efficient updates and smart home additions as well.

 

Lake home owners face different obstacles when it comes to home financing and equity. But if done right, you could ensure financial security for years, and generations, to come.

The Hidden Costs of Keeping A Lake Home: Tips for First-time Buyers

Lake house cabin waterfront lakefront home

Before purchasing your dream house, you may have looked into the hidden costs of buying a lake home.

Now that you’re moved in, you might be wondering what it’s going to cost to keep the place in tip-top shape.

You will run into several smaller, and occasionally larger, costs when maintaining your lake home. These add up, and the bottom line can catch many first-time homebuyers by surprise.

Here are some of the most common hidden costs of keeping a lake home.

Home Repairs

Lake homes are often located on gorgeous plots of land, with stunning views of the water and the natural surroundings.

Because of this, lake homes often absorb far more damage from the elements. The wind and rain, the lake itself, even the trees around your property can contribute to these hidden costs.

On average, lake homes require more frequent repairs and maintenance. Common repairs and their causes:

  • Damage due to wind and storms
  • Roof or structural damage due to falling tree limbs
  • Foundation issues due to fluctuating water tables
  • Siding replacement due to wind damage
  • Mildew due to high moisture content in the air
  • Damage due to wildfires (most common in western states)
  • Flood damage

The Great Outdoors

Photo courtesy of Walton Architecture & Engineering.

Remember that you are responsible for the entire property you own, not just the house itself! Lawn upkeep, landscaping, tree trimming, and other costs can be a hefty responsibility.

For homes with forests or large trees nearby, tree trimming is a must.

Limbs overhanging your property or power lines could do serious damage. Spending a few hundred dollars to have a professional remove any overhanging limbs can save you tens of thousands of dollars in damage.

Don’t forget the shoreline.

If you own a waterfront property, you may be responsible for the seawall. This structure protects your property line from erosion. Repair estimates vary, but installation can cost more than $100 per linear foot.

If this is not your primary residence, you will need to hire someone to mow the lawn regularly. Your neighbors won’t appreciate having an overgrown field next door!

Many lake properties are also located on hills or steep inclines, too. Don’t assume that your push mower will always do the job.

Home Improvements

Once you have bought your lake home, chances are you want to customize it. Plans to improve the property are often made before it’s even been selected.

If you have your heart set on any of these improvements in the first few years, be sure to calculate that into your long-term budget.

Many first-time lake home buyers neglect to include these in their budget when shopping for a lake home, even if they fully intend to install them.

  • Deck
  • Hot tub
  • Barbecue grill
  • Swimming pool
  • Garden
  • Guesthouse
  • Firepit
  • Energy-efficient windows/lighting

Be sure that any improvements are permitted by local laws and regulations, too. Many lakes require special construction permits. Also, be sure to look into how to find the right contractor for the job, if you won’t be the one completing the projects.

Docks

Photo courtesy of Shiflet Group Architects.

The average wooden boat dock lasts roughly 20-25 years.

Repairs may only cost a few hundred dollars, but replacement can cost several thousand. Factors such as climate, size, and water depth factor into this cost.

If you plan on owning your lake home long-term and have a dock, chances are it will need to be replaced eventually.

This process will accelerate if your lake freezes over in the winter, too. Freezing and thawing over several years will inevitably deteriorate any material.

Two of Everything

For people who have a lake home as their secondary residence, there is what we like to call the “two of everything” cost. For everything you keep at home, you will need at least one more set for your lake home.

Buyers rarely budget for this, but it adds up incredibly fast. Don’t fall into the trap of assuming that you’ll just ferry everything from your primary residence to the lake home every time, either.

  • Furniture
  • Appliances
  • Cookware and dinnerware
  • Sheets, linens, and towels
  • Decorations
  • Tools
  • Toiletries
  • Cleaning supplies
  • Children’s toys

This is also true for utilities.

Remember, owning a second home means having two power bills, two telephone bills, two water bills, etc.  These can often rival a car (or mortgage) payment if you aren’t careful! Be sure to budget for this.

Many experts highly recommend a security system for any secondary residence. Houses that are not lived in full-time are especially vulnerable to break-ins.

Even if you visit every weekend, having a security system in place can give you great peace of mind.

Having a security system can give you real peace of mind, if you go weeks, or even months, without visiting your lake home.

Guests

Guests can be the most noticeable, if not the biggest, cost of owning a lake home! This can include your extended family, your neighbors, friends, coworkers… anyone you invite over to enjoy your beautiful new lake home!

Lake homes can serve as the perfect getaway for you and your loved ones.

The hidden costs of playing host can add up quickly, though. Especially for a large lake house.

For large gatherings, don’t be afraid to ask guests to chip in food, beverages or other supplies. This can help offset what would otherwise be a huge cost.

It is difficult to estimate many of these costs in advance. Still, if you spend a little time on them, they can give you a much better idea of your budget.

You will be much better prepared to not just buy your lake home, but to enjoy it for years to come.

For more advice on purchasing a lake home, read “Hidden Costs of Buying A Lake Home: Tips for First-time Buyers“.

How Does a Down Payment Affect a Home Purchase?

TOnce you find a home that you have fallen in love with, you will probably try to do the math immediately. There is a rule of thumb that tells you to calculate 20% of the loan to figure out your down payment.

down payment on a homeHowever, it will also depend on the type of loan. The down payment will affect how much your loan is. This will also affect the amount you pay as far as interest.

Loan and Value Ratio

Once you take out a loan, the lender will asses the loan to value ratio. This ratio is also called the LTV ratio. This is the assessment between the value of the home and the value of the loan.

For example, if you are buying a home that is $200,000 and you have $40,000 for a down payment, then you have saved 20% for the down payment. So in this specific case, the LTV ration will be 80%. The reason a lender looks at this is that the lower the ratio, the lower the lender’s risk for loaning to you.

Conventional Loans

The government does not back conventional loans, and it also requires the LTV ratio to be 80% or less. The borrower that has less than the 20% for a down payment may be approved for this type of loan, but only if the borrower agrees to pay for private mortgage insurance (PMI).

PMI is a monthly payment that is created to protect lenders if the loan goes into default until at which time the borrower reaches the minimum 20%.  Now that you know what this type of loan is, you will know that when someone is speaking of a 20% requirement, they are speaking of this type of loan.

Government Backed Loans

If you do not have the 20% for a down payment, then you will seek out a loan that is backed by the government. These loans are referred to as FHA loans and are backed by the Federal Housing Administration. Typically the down payment can be as small as 3.5%.

In the case previously stated of the home for $200,000, the down payment of 3.5% would be $7,000 for a down payment, leaving the LTV ratio at 96.5%. This process is considered extremely risky. In this situation, the borrower will be required to get PMI.

VA loans can also be used and backed by the Department of Veterans Affairs. These type of government loans are the only loans that do not require the borrower to have a down payment or PMI.

In conclusion, your down payment will affect which type of loan you will use to purchase your house. It is in your best interest to have as much of the amount saved as possible to lower the loan value, increasing your chances of securing a loan and not being required to pay out extra for PMI.

Home Buying Basics: What is Title Insurance?

what is title insuranceOnce you buy a home, you will need to be sure there are no issues with the title of the home. If there is a problem with the title, then it can limit the use and the enjoyment of the new property. It can also bring on financial loss.

Title Search

Once the sales contract is accepted, a professional of titles will then search for public records in order to look for any potential problems with the property’s title.

The search will normally involve a review of any land records that go back several years.

It is the job of the professional to fix the issues before the closing on the property. For example, if a previous owner had minor construction completed on the property, but has never paid the contractor; it is the job of the professional to solve the issue.

Owner Title Policy

There are times when a problem can occur that cannot be found by the public records or are missed during the search process. In order to help protect you, it is highly recommended that you have an Owner’s Policy of Title Insurance. This will ensure that you will not be subject to any issues that are unforeseen.

The Owner’s Title Insurance, also referred to as Owner’s Policy is typically issued in the total amount of the property purchase. It is a one-time fee during the closing and will last for as long as you or any heirs have interest remaining on the property. Only the Owner’s Policy will fully protect the buyer and should a covered title issue come up that was not found during the search, it will be taken care of. Possible issues that can arise are:

  • Mistakes in Records
  • Forgery
  • Errors or even Omissions in the Deed
  • Undisclosed Heirs

The policy will provide the assurance that the title company will stand behind the buyer monetarily and will provide legal defense should it be needed. The bottom line is the title company will be there to aid in any valid claims. You are also even able to purchase expanded coverage.

It is called Homeowner’s Policy and it will cover other things that the Owner’s Policy does not cover. Talk to the local title company and ask for an explanation of the Homeowner’s Policy they can offer you.

Loan Policy

There are different types of title insurance. Owner’s Title Insurance and Lender’s Title Insurance. Most of the lenders will typically require a Loan Policy in which they will issue a loan.

The policy is normally based on the amount of the loan. It will only protect the lender’s interests in the home. Should an issue come up, it will protect the lender.

It does not help the buyer. The policy amount will decrease with every year and will ultimately disappear as you pay off the loan. The bottom line is that the policies are crucial in order to protect you from unforeseen issues that may come up before and after purchasing your home.

Understanding the Basics of a Mortgage

There are a few options when it comes to taking out a mortgage. No matter what type of loan you choose to get, you need to properly research it so you fully understand the terms and conditions.

You will also want to research your lending institution to ensure they are a solid financial center and to learn whether they deal with customers properly.

Types of Mortgage Loans

One type of loan you may not know about is the 50-year loan. As the name connotes, you can make payments over forty to fifty years for your lakeside home.

While it feels like you are making payments for your entire life, it does give you the opportunity to lower your payments each month to a more affordable rate.

The most common type of mortgage is a classic 30-year, fixed rate, amortized loan. This is where payments first go towards interest, then later towards the principal. Also popular is the same type of loan paid back over 15 years. This reduces the overall amount of interest you pay over the life of the loan.

All loans are evaluated for whether they conform to the Fannie Mae/Freddie Mac underwriting guidelines. If the loan meets their terms, it is called a conforming loan. If it doesn’t, it is a non-conforming loan.

The typical amount that qualifies as conforming is under $417,000, except in Alaska and Hawaii where the amount is more. This amount can change based on the changes in the market.

Non-conforming loans will typically have a higher interest rate. So, if you don’t have to have such a large loan amount, you can save significant sums over the long term.

Who backs the loans?

A conventional loan is not guaranteed by the government, but an FHA (Federal Housing Administration) loan is. Some loans are also issued by the Veterans Administration for veterans to be able to get an affordable home loan when they no longer want or qualify for base housing.

What should I steer clear of?

Some of the more questionable types of loans include the 5/1 adjustable-rate mortgage, which las a low, locked in rate for the first five years. But, after that the rate varies. In many cases this leads to a dramatic increase in your monthly payment as a result of a higher interest rate.

One type of loan that was more common pre-recession is a zero-down loan, leaving the entire amount of the home value to be financed. The risk from these types of loans was great, and defaults on them comprised one of the triggers of the great recession.

If you are interested in taking out a mortgage to either buy a vacation retreat or for your first home, be sure you talk to a financial expert. They can help evaluate your situation and help you determine how much you should try to get a loan for.

Matching your home to the amount you can afford is a science, but it’s a step well worth taking.

Should You Consider Refinancing Your Mortgage?

RefinancingThere are any number of reasons to refinance your existing mortgage or mortgages. Start by considering what you hope to get out of a refinance and whether a refinance will save you in the long run.

If the list of reasons to refinance is longer than the list of reasons not to, or if your cost savings will be significant, then it’s a good time to consider refinancing.

What are some of the reasons to refinance your current mortgage?

*  First, if it gains you a better interest rate and/or it changes the term of the mortgage, then a refinance makes good sense. No refinancing plan will ever pay off your debt; rather it modifies the current loan. Lowering the interest rate is one of the top reasons people refinance. Now that banks are more willing to lend to people again, even those who owe more than their home is worth are more likely to be eligible.

*  Debt consolidation is a second reason. Some people have a lot of credit card debt that runs them hundreds of dollars a month in minimum payments. It makes good financial sense for some to refinance their mortgage and lower the overall amount they pay each month. Also, if you have a home equity loan or line of credit as well as a mortgage, it sometimes makes good sense to put the two together. This will lower the payments each month.

*  Third, many people got into loans with attractive entry level rates that then ballooned when the adjustable rate portion kicked in. Being able to lock in their interest rate at a consistent rate for the remainder of the loan period is very appealing and should be strongly considered.

*  Another major reason is because people need some extra cash. Though it might not necessarily be a refinance, a restructuring of an existing loan can mean a substantial check sent to the homeowner. This can be used to start a business, care for an aging parent, buy investments, or do home repairs.

*  Sadly, sometimes a divorce can mean a need to refinance, if for no other reason than to remove the other spouse’s name from the title. It sometimes helps the person who will be staying in the house by giving him or her a lower monthly payment, since now there is only one income paying the bills.

Some factors to consider when refinancing include the costs of the fees and any title paperwork filings. These can sometimes eat up any savings that might otherwise be realized.

Also consider that the house will still always be the item the bank holds as collateral. This can be especially important if the refinance is being done as a way to get additional funding for something else and not just saving money each month.

For many, though, refinancing can be a good answer to a tough financial situation.

How to Compete in the Lake Home Market Without Cash

Negotiating real estateA lake home can be a great investment, whether you’re looking for a vacation home for your family to enjoy, or a primary residence.

Finding the right lake home can be difficult as there are a lot of different factors to consider. This includes proximity to the lake, proximity to a town, homeowners insurance requirements, and much more.

This means that there’s no better feeling than finding that perfect lake home. However, you may run into problems if you are bidding for the lake home against another home buyer. This is especially so if that home buyer is offering to pay in cash.

The following are a few tips that you should use in order to compete for your dream lake home against someone willing to pay in cash:

  • Get a pre-approval – You should be pre-approved for a mortgage before you begin looking for a lake home. This way, you know exactly how much you can spend and won’t waste your time looking at homes that you won’t be able to afford. There’s nothing more frustrating than finding your dream lake home and realizing, after the fact, that you won’t qualify for the price of that home. Having a pre-approval on hand will also show the homeowner that you will be able to pay for the lake home. A lake homeowner who’s faced with two bidders, one with cash in hand and the other with nothing, is going to choose the bidder who can prove that he or she can pay quickly with no problems.
  • Have proof of funds – In addition to having your mortgage pre-approval for the lake homeowner to see, you should also provide proof of funds. This is to show that you can afford the down payment and the monthly mortgage payments. While a cash payment might still look a little more attractive to the owner, showing the owner that you have the means to pay for your pre-approved mortgage is a good start.
  • Personalize your bid – Provide some information about yourself and why you want the home. You can swing the seller’s emotions into your direction by telling him or her a little about yourself. For example, explain why you want the lake home. Maybe it reminds you of a vacation home you used to visit when you were a child, and you want your own children to have a similar experience. This could help make the seller favor you. Especially if they have no idea who the other bidder is, or if the bidder is simply someone that’s buying up property in order to flip it at a later date. There’s nothing wrong with tugging on the seller’s heartstrings. Especially since you’re trying to get him or her to come down on the price.
  • Offer more – If the lake home truly is the perfect lake home in your eyes, then maybe you would be willing to offer a little bit more for the home than what the seller is asking for (as long as your pre-approved mortgage will cover it). Most buyers who are looking to buy property in cash aren’t willing to go higher than the asking price. This means you’ll have a better chance of outbidding them. You can even have an escalation clause added to your bid. This basically gives authorization to your real estate agent to offer a specific amount above the best offer that the lake home seller receives. This is an excellent way to gain an advantage in any potential bidding war and shows the seller that you are serious about the lake home. If you decide on an escalation clause, just realize that you may end up overpaying for the lake house.
  • Waive the home inspection contingency – If you’re very serious about the lake home, pay for a home inspection before you make an offer. If everything looks okay, offer to waive the home inspection contingency, which would favor the seller.
  • Waive the appraisal contingency – If you can afford to cover the gap between a low appraisal of the lake home and the offer you have made, offer to waive the appraisal contingency.

If you find the lake home of your dreams but are competing against someone willing to pay cash, don’t give up just yet.

Keep in mind that at the end of the day, the seller of the lake house usually only cares about how much money he or she will get. Not whether it’s in cash or if it’s financed. While cash will always be slightly more attractive, you can still win over the seller by using these tips.

Why Cash Is Still King In Real Estate Home Buying

ResearchCash down payment for home buying has shown that cash is still king in real estate home buying. Millions of people who are buying homes and commercial business properties across the globe are increasingly opting to pay using cash as opposed to other means of financing.

Cash deals on homes account for more than half of the sales in major markets.

One thing that you need to understand is that cash buyers are better positioned to get better deals in the marketplace.

Sellers are FAR more comfortable dealing with a buyer who pays in cash. Rather than someone who opts to pay using other financing sources.

What about first-time buyers, is a cash purchase a good ideas?

Many experts out there argue that cash deals are negatively affecting first-time home buyers. This is not always the case. Many first time buyers love to depend on home loans and mortgages when purchasing a home for their families. Though, there are still those first time home buyers with cash on hand.

The good thing with paying by cash is that you typically get the opportunity to negotiate with the seller. Too, you can agree on terms on a more personal basis. This might be an ideal choice for first time buyers who want to get the most value (lowest price) of an all cash home purchase.

Cash buyers are on the rise

Research shows that in 17 of the largest cities in the United States, 32% of home buyers currently prefer to pay for their initial purchase with the use of cash. What’s more, statistics show cash purchases in the United States have been on the rise since the year 2011.

In fact, the rise in these all cash home purchases started in the year 2007 when the housing bubble burst. It was during this time that cash purchases accounted for close to a third of all purchases by the year 2011.

Another element that has triggered this is the tightening of mortgage lending standards, fewer home sales, and investor purchases. Since it is quite hard to qualify for a mortgage from most lenders today, cash is a much better option.

When you take a look at the housing market in the United States and other parts of the globe, you’ll find that the largest percentage of homes bought without a mortgage are on the low and high ends of any market. As prices get to the upper level, everything seems to change. All cash purchases start to become more likely and a preferred option among most high end buyers.

What does the future hold for real estate purchases?

A considerably large percentage of wealthy home buyers in the United States are starting to come from overseas buyers. Apparently, a large number of them prefer to pay for their purchases in cash. This further proves that cash is still king in the real estate home-buying sector.

As for the future, things look brighter for both buyers and sellers. People are willing to pay for purchases using cash instead of mortgage financing and sellers typically find the cash option to be most desirable.