Up Pops the Real Price Tag

When purchasing a house for the first time, buyers often worry about coming up with that 3 to 5 percent down payment, especially now that no-down-payment loans seem to be a thing of the past.

But what they sometimes don't count on is that the closing costs that go along with a mortgage loan usually add another 2 to 4 percent of a home's purchase price to their out-of-pocket expenses.

That can be a burden for buyers, especially because it comes on top of a down payment for which many people spend a long time saving.

"A lot of first-time buyers mix up the down payment and the closing costs," said Ginger Groene, an agent with Re/Max Allegiance in Alexandria. "They think if they're buying a $300,000 house that they have to put $9,000 down." That would be a 3 percent down payment.

"They don't figure on the 2 to 3 percent that closing costs will add to it. They'll need to have at least 6 percent of the purchase price in the bank to get the process started. When some buyers hear this, it really throws them." These days, sellers increasingly agree to cover some of these costs to close a deal, but any seller help must be negotiated upfront. And lenders put limits on how much the seller can contribute.

Closing costs include a wide variety of fees, such as transfer taxes, title insurance, appraisal fees and document-preparation charges.

The best way for buyers to find out about these charges is to speak with their lender and their real estate agent. Agents often can provide buyers with a list of possible closing costs. A Web site of the Department of Housing and Urban Development, http://www.fha.gov/buyer/closing.cfm, also contains a listing of potential closing costs and settlement fees.

Costs continue beyond the settlement table, too. Groene recalled a couple who worked with her to purchase a home in Haymarket. Unfortunately, they stretched themselves too far financially, taking out an adjustable-rate mortgage to get into a $750,000 house. When the loan adjusted, they faced far higher mortgage payments.

The ending of the story isn't a happy one: "Within a year, they had to get second jobs, get rid of their nanny, move and look for someone to rent their home, the whole nine yards," Groene said. "They should have known better. They bought a 5,000-square-foot home. It was gorgeous, but it was too much for them. They didn't factor in everything they would have to pay to buy and own that large of a house."

A Taxing Situation

After closing costs, local taxes are probably the biggest surprise to inexperienced home buyers.

In the District, for example, home purchases involve two separate levies, a recordation tax and a transfer tax. Buyers usually pay the recordation tax while sellers handle the transfer tax, though this is negotiable. The setup may vary in other regions depending on local customs.