This year, I’ve helped more clients strategize around real estate than ever before. While some have decided to sell their homes, more have decided to take advantage of ultra-low mortgage rates and take the plunge into the real estate market or refinance an existing mortgage.
What I’ve found is that while many clients have thought about their down payment and monthly outlay, they are often confused about closing costs and their impact on home affordability. For my clients – who are mostly purchasing or refinancing property within New York City and surrounding areas – closing costs can add significantly to the amount of cash they need to bring to the closing table.
Buyer Closing Costs in New York City
While purchaser closing costs vary, in New York City they generally run between 2% and 4% – but sometimes over 6% – of the purchase price. The biggest determinants are the type of home (co-op vs. condo vs. house), mortgage amount, and whether the seller is a sponsor (this is usually new construction or a condo conversion of a townhouse). In addition to these costs, you’ll also generally need to pre-pay some future costs (property tax, insurance, etc.). This means for a $1,000,000 home purchase with a traditional 20% down payment, you’ll need to bring an additional $25-65,000 to the table.
What Goes into Closing Costs:
The short answer to this question is fees and taxes.
For most purchases or refinances in New York, you can expect to pay the following:
- Bank fees or mortgage origination fees (sometimes these are waived)
- Appraisal fee ($500-700)
- Title fees
- Title Insurance ($450 for every $100,000 in purchase price, condo/house only)
- Mortgage Title Insurance ($200 for every $100,000 in purchase price)
- Bank attorney fees
- Credit reporting fees
- Survey fees (depends on property type)
- Lead paint disclosure fee
On a purchase (as opposed to a refi), you’ll also have to hire an attorney. Some work hourly and some charge a flat rate for a purchaser. Costs here can range quite a bit depending on the complexity of the deal, but we generally see rates for a simple sale at around $3,000-5,000.
Prior to closing – and even before you sign the contract to purchase – you’ll also want to have an inspection performed by a structural engineer. This can range in cost from $500-1,000. Depending on the property, you may also want to have additional inspections performed by professionals with specific expertise (e.g. roofing contractors, mold inspectors, etc.).
For some apartment buildings, you’ll also have to pay application fees, move-in deposits and pre-paid common charges.
For a New York City purchase, the amount of tax you pay at closing depends on the purchase price, the size of your mortgage and the type of home (co-op, condo/house, new construction) you are purchasing. The three types of taxes that you may pay at closing are the following:
New Construction/Sponsor Condo/House
|Mansion Tax(purchases $1M+)||YES||YES||YES||NO|
|Mortgage Recording Tax||NO||YES||YES||NO|
As you can see, you’ll pay the least tax on a co-op purchase and the most on a condo or house that is considered new construction or purchased from a sponsor. On a refinance, you will generally avoid these taxes. *The mortgage recording tax may sometimes come into play if your current bank does not agree to assign the mortgage to the new lender.
The idea of a mansion tax in New York City can often elicit eyerolls. In many neighborhoods, $1,000,000 may buy you a not-large 1-bedroom apartment. Nonetheless, you’ll still have to pay this tax at any price $1 million or above. This is why you often see homes listed at a price of $999,000. Sellers know that you’ll save $10,000 in taxes if they keep the price under that $1 million threshold.
The amount of the tax is based on the purchase price and ranges from 1% (on a $1-2 million purchase) all the way up to 3.75% (if the purchase is $25 million or more).
Mortgage Recording Tax:
The amount mortgage recording tax you pay is dependent on the size of your mortgage. For a co-op, since you’re technically purchasing shares of the co-operative as opposed to real property, there is no mortgage recording tax. For other types of properties, you’ll need to pay this. The tax ranges from 1.8% of the loan amount – on a mortgage of $499,999 or less – to 1.925% for mortgages above that amount.
For a refinance, most lenders will assign the mortgage to the new lender and you won’t have to pay this tax.
On most sales, the seller pays this tax. The exception comes when you are purchasing from a developer. In New York City, this tax ranges from 1.4% on a purchase less than $500,000 to 1.825% on purchase over $500,000.
There can be bit of good news here. There is sometime some negotiability over which party will be responsible for this tax. If a developer needs to sell faster, they may be willing to cover some or all of this tax. When I bought my first apartment during the housing crash of 2008, we were able to negotiate the deal so the developer paid this tax.
Prepaid costs are those that you’ll have to pay at closing that will cover some of your future costs. While it can be frustrating to have to bring even more cash to the table, these are costs that you’re really paying yourself. These include pre-paid mortgage interest to cover the partial month in which you close, one quarter’s property tax, and 6 months to a year of homeowner’s insurance. If your lender is going to pay your taxes and insurance going forward, you’ll also need to add some money to an escrow account to get this started. For a co-op or condo, you’ll also need to pre-pay some common charges.
Wrapping it up:
Closing costs in New York City can be significant and can sometimes be the difference between purchasing now or continuing to save for a home. If you’re wondering about the financial impact of buying a home in NYC and beyond, we can help you strategize. You can schedule a 15-minute Introductions call here.