Budget for Settlement Costs – Loan Origination Fees, LMI (Lenders Mortgage Insurance) & Stamp Duty
Once you reach an agreement on the purchase of a home, things start moving quickly. In the chaos, it is important to remember to budget for settlement costs.
Settlement costs are fees associated with miscellaneous events associated with a home purchase, things such as property inspections, stamp duty, conveyancing fees etc. Even if you are purchasing a home for the first time, you are probably aware there are closing costs that have to be paid. Rarely, however, are you aware of just how much and how fast the can accumulate. If you have not budgeted for them, they can put a kink in the settlement or even cause you to lose the home.
A couple of closing costs to keep in mind are origination fees for home loans and lenders mortgage insurance. The mortgage related costs are only a small part of the overall closing costs you can face, but deserve a closer look.
Origination fees for home loans can be a shock to first time buyers. Few realise they are going to have to pay such things. Origination fees are costs charged by a lender for services used to determine if the lender should give you a loan in the first place. For example, a lender will often charge you fees for having a valuation done on the property. Infuriatingly, the lender will also charge you fees for processing the loan and preparing the loan documents. On a $400,000 loan, the origination fees can quickly add up to thousands of dollars.
Lenders mortgage insurance, often called LMI, can also be a nasty little surprise. The magic number when considering LMI is 20 %. If you pay a deposit on the home that is less than this amount, you are almost certainly going to have to pay LMI. LMI is simply insurance that protects the lender should you default on the loan. The cost can add up to hundreds and into the thousands of dollars, so make sure you know what is expected of you.
Stamp Duty is the one, in my experience, that is consistently overlooked. As a general rule I always tell clients to allow approx. 4% of the purchase price to cover these costs. It is usually a little less, and varies from state to state – however I find it always better to lean towards the conservative side. Settlement costs are aggravating – budget for them up front, and you will feel less aggravation.
Author: Melanie Burns
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