The Hidden Costs of Buying a Home
- By Juhlin Youlein
- Published 10/19/2011
- Real Estate
- Unrated
When buying a home there are several different costs that must be factored into the equation. These different costs will often times create cases when owning a home a more costly than alternate methods of living. These cases may include planning on living in the home for a short amount of time, borrowing money with an unusually small down payment, or even buying and selling homes in a market with relatively stagnant prices. The different costs include purchase points, interest rates, and closing costs.
Purchase points come with a variety of names including buy-downs and discount rates. When planning on buying a home, a consumer will often borrow from a lender, and the lender will charge interest on the loan. If the consumer is planning on keeping the home as a long-term place of residence or as a long term investment, then it is advantageous to have the lowest interest rate possible. A purchase point is an opportunity as the home is closing for the borrower to effectively buy down the interest rate. One purchase point is equal to one percentage point. Meaning if the borrower borrows $110,000.00 then one purchase point will be $1,100.00. The catch comes when realizing that purchase points are a heavy additional monetary weight to bear for the borrower at closing.
The interest rate is the cost the borrower bears for borrowing money. The interest rate is conversely the reward or return the lender makes for lending
money. Interest rates are often affected by the risk involved to the lender in lending money. The higher the risk involved, the higher the interest rate will be. An example is a twenty year old boy going out to dinner with his successful well-off parents, the waiter brings the check and his parents realize they do not have their check card and the tell the son they will pay him back the next day, with a little extra. This is a pretty safe loan, and the son will probably only expect a few dollars as “interest.” On the other hand, this same son goes home and his out of work roommate can’t make rent and asks for a loan promising to have the money the next Friday. This is a comparatively much more risky loan and the same son will probably ask for a lot of “interest” if he gives the roommate the money. In the world of real estate, if a borrower has a lower credit score, offers to put less than usual money down, or even if the loan is for a super long term, then the lender will perceive an additional risk and ask a higher interest rate.
Buying a home also comes with a plethora of fees. These fees include the brokers commission if one was used, the application fee, the appraisal fee, the assumption fee, the credit report fee, lenders inspection fee, survey, loan origination fee, the process fee, taxes, etc. The list is almost never ending and can quickly add up to 3-8% of the entire cost of the home. Because of the many closing costs, buying and selling homes quickly in a stagnant pricing market can actually be more expensive than beneficial.
Purchase points come with a variety of names including buy-downs and discount rates. When planning on buying a home, a consumer will often borrow from a lender, and the lender will charge interest on the loan. If the consumer is planning on keeping the home as a long-term place of residence or as a long term investment, then it is advantageous to have the lowest interest rate possible. A purchase point is an opportunity as the home is closing for the borrower to effectively buy down the interest rate. One purchase point is equal to one percentage point. Meaning if the borrower borrows $110,000.00 then one purchase point will be $1,100.00. The catch comes when realizing that purchase points are a heavy additional monetary weight to bear for the borrower at closing.
The interest rate is the cost the borrower bears for borrowing money. The interest rate is conversely the reward or return the lender makes for lending
Buying a home also comes with a plethora of fees. These fees include the brokers commission if one was used, the application fee, the appraisal fee, the assumption fee, the credit report fee, lenders inspection fee, survey, loan origination fee, the process fee, taxes, etc. The list is almost never ending and can quickly add up to 3-8% of the entire cost of the home. Because of the many closing costs, buying and selling homes quickly in a stagnant pricing market can actually be more expensive than beneficial.
Juhlin Youlein
Juhlin Youlien writes about az real estate including Paradise Valley AZ homes for sale and Fountain Hills AZ homes for sale. Paradise Valley real estate and Fountain Hills real estate include luxury home areas in AZ.
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