Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
In the next few weeks I’m going to cover all the closing costs I can think of. In past weeks I’ve covered the down payment, the cost of a Realtor, earnest money deposits, and prepaid closing costs. This week I’m going to hit flood elevation certificates, insurance, and escrows. Oh, and freaking out about closing costs too!
Flood Certs and Homeowners Insurance
I’ll cover flood-elevation certs first.
For many homes (or a first-floor condo or townhome) near water, rivers, lakes, streams, creeks, swamps, and the ocean, even if the body of water doesn’t exist anymore, you might need a flood-elevation certificate (“flood cert”) to get an insurance quote. And you need insurance if you want a loan.
You will probably need the flood cert before you can even shop for insurance. Insurance companies almost won’t talk to you (at least not in Florida) if you don’t have a flood cert.
Once you’ve decided on your insurance company, you can “bind” the insurance by paying for it immediately in full. You always have to pay for a full year of insurance up front, but you can choose to do it right away or wait until closing.
But understand, whether you do it now or do it at closing, you have to pay for a full year of homeowner’s insurance up front.
And this full year does not include the insurance escrows, which I’ll cover in the next section.
Quick tip: It’s a good idea to have a survey done at the same time as the flood cert because they are both done by surveyors; if you do them separately, it will cost more because the surveyor has to come out twice.
Sometimes a survey is required by a bank to get a loan, and sometimes the bank will accept an old one. It can be a really good idea to have a new survey done early in the process so you know exactly where fences and buildings sit on a lot, just in case something is over the line and needs to be dealt with—especially if the existing survey is several years old, and fences or outbuildings have since been added.
Escrows? What the Hell Are Those?
Tax and insurance escrows are the time bombs of closing costs.
They are easy to miss.
While your lender will include escrows on your monthly payment estimate, they are often forgotten or overlooked for the closing-costs estimate.
This can lead to sticker shock on the day of closing.
Your monthly mortgage payment will have one month’s worth of property taxes and one month’s worth of homeowner’s insurance tacked on.
The money for taxes is put into one escrow account. The money for insurance is put into another escrow account.
An escrow account is basically a holding account. It has one purpose: to hold enough money to pay your taxes or insurance when they are due.
At tax time, or when your insurance bill is due, these escrow accounts will have enough money to pay the bill. You don’t have to remember to pay it. You don’t have to write a separate check. It happens automatically.
Here’s where the time bomb comes in.
At closing, they will charge you two to four months’ worth of taxes, and two to four months’ worth of insurance, to “build up” these accounts for the first time.
If the taxes are $4,000 a year, three months’ worth of taxes would be $1,000. If you weren’t preparing to pay that extra thousand at closing, or if you weren’t aware of it, you are going to freak out a bit. Many people do.
So if you are heading into a real estate closing, take a good look at your closing-costs estimates. Find the tax and insurance escrow estimate. If you don’t see it, call your lender.
Note: Starting on August 1, 2015, the Loan Estimate provided when you shop mortgages will have estimates of your monthly payment and closing costs that will be fairly accurate. It will still be a “time bomb” if you put the Loan Estimate aside, however, and don’t look at it until a few days before closing.
Get Your Freak On (Freaking Out About Money)
Feels like you’re being fed by a fire hose right now, doesn’t it?
“What the hell,” you say. “I just wanted to pay for the house!”
“What are escrows?!” you continue, wide-eyed and exasperated. “Who said anything about inspections? Pests and wood rot? I need those? I am so NOT buying a house!”
It’s cool. Something you need to know right now: Every buyer in every home purchase has a freak-out moment.
Have your freak out, take your mind off it for a day or two, and you’ll feel better. It’s all good.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.