Owning your own home is a major life achievement and something many consider integral to the American Dream. It takes months, or even years, of hard work and saving before purchasers even start looking at homes. Any Philadelphian who reaches this milestone should feel proud of their accomplishment.
However, buying and selling real estate in Philadelphia can be complex and confusing, even for those relying on guidance from their agent. It can be a longer process than expected with several opportunities for bumps in the road and other surprises. One thing many first time homebuyers find particularly surprising is the hidden costs associated with buying their first home. These costs can quickly add up and increase the cost of homeownership far beyond the agreed purchase price and monthly loan payment.
In this guide, you will learn about the hidden costs associated with closing your loan, taxes and fees owed to the city and state, the ongoing costs of homeownership, and read here: How to Avoid Philadelphia Transfer Tax?
Costs Associated With Your Loan
Your mortgage lender charges fees at closing to cover the costs associated with funding your loan and protecting their investment in your home. Each lender will be slightly unique in which fees they cover, but common lender fees include:
- Assessing the home value
- Loan origination fees
- Underwriting fees
- Title insurance
- Escrow fees
- Inspection costs. This inspection is separate from the appraisal.
- Homeowners insurance
Government Taxes and Fees
Fees paid to the city of Philadelphia make up a significant portion of your closing costs. They may add up to more than what your lender charges. Taxes and fees include:
- Recording fee for the city to record the documents filed as part of the transaction.
- A fee to remove the seller’s name from the mortgage and add the new owners to the city’s records.
- Prepaying the year’s property taxes. Your taxes will be prorated based on how much of the year is left after your closing date.
- The real estate transfer tax, essentially a sales tax on property.
Avoiding the Real Estate Transfer Tax
At 3.278% of the agreed home price, Philadelphia’s real estate transfer tax will be the largest single item in your closing costs. While it’s split evenly between buyer and seller, it still adds significantly to the cost of buying a home. This tax is nearly impossible to completely avoid, but there are exemptions available you may qualify for that can reduce the total amount paid. You can also structure the deal to separate out any items included in the sale, such as furniture or TVs.
Real estate transfer tax exemptions are a murky, complex subject, and getting it wrong will have serious legal consequences. Hiring a real estate law firm to handle your sale is the best and safest way to find any opportunities to reduce or avoid paying the tax.
The Ongoing Costs of Homeownership
The costs of ownership associated with your new house are perhaps some of the best-hidden costs involved in buying property in Philadelphia. Unfortunately, many new homebuyers fail to consider ongoing costs when determining their budget during the buying process. Each cost – except for property taxes – may be small on their own but will add up each month as you pay your bills.
Ongoing costs of homeownership include property taxes, utilities, maintenance and repairs, and homeowners insurance. If you live in a condo building or subdivision, your monthly payments will also include an assessment paid to your homeowner’s association.
When shopping for new homes, it’s vital you think hard about your monthly budget and plan your spending carefully.