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Recurring Costs

DEFINITION

Costs that are paid repeatedly, on a periodic basis (often once a month) and are usually fairly predictable.

EXPLANATION

In the context of real estate, recurring costs usually refer to the costs which the borrower first pays at closing, but that will continue to occur after closing as a cost of maintaining the property.

Such costs include:

–             Property taxes, collected by the local government and varying from state to state, as well as based on the value of the property.

–             Insurance premiums including hazard and flood insurance. Hazard insurance, covering physical damage to the property, may be required by the lender, with the premiums included in the borrower’s monthly mortgage payments.

–             Mutual or private mortgage insurance (PMI) premiums. Purchase of PMI is a requirement for most conventional loans in which borrowers pay less than a 20 percent down payment, and is intended to protect the lender in case the borrower stops making mortgage payments.

When as escrow or impound account is established, lenders may require borrowers to pay a “cushion” of approximately two months of escrow payments, consisting of recurring payments for taxes and insurance.

Recurring Costs versus Non-Recurring Costs:

In contrast to recurring costs, non-recurring costs consist of one-time fees that buyers pay only at the time of purchase, typically at closing. These may include:

–             Loan origination fee for processing loan paperwork

–             Credit report fee

–             Attorney’s fees

–             Underwriting fee

–             Home inspection fees

–             Appraisal fee

–             Survey fee

–             Title insurance and title search fees

–             Pest inspection fee

–             Recording fee

–             Discount points paid in exchange for a lower interest rate

Budgeting for Recurring Costs:

Housing expenses, including recurring costs, are a major portion of almost every budget. Experts recommend spending no more than 30 percent of income on housing. Tips for budgeting recurring costs, as well as other housing expenses, including the following:

–             Choosing a location in accordance with the borrower’s budget. Location is a major factor in determining both recurring and non-recurring closing costs, which vary widely from state to state and from region to region. The average price of homes, laws governing the closing process, property taxes and real estate transfer taxes will all vary by location and will factor into recurring housing costs.

–             Setting a realistic budget based on existing income, assets and expenses. Calculating the budget available for recurring housing expenses requires taking into account other recurring expenses, such as student loans, car payments, etc., as well as leaving enough “wiggle room” for unexpected payments such as medical bills, repair bills, etc. Experts do not recommend setting a budget based on the anticipation of future higher wages, as living expenses are currently increasing at a faster rate than salaries

–             Shopping around when deciding on a lender, as well as in regard to specific services included in closing costs, including homeowner’s insurance. Studying and understanding the real estate market is an essential factor in effectively shopping around for services.

–             Asking the lender to pay closing costs: many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing-costs credit. Buyers who are short on cash for the down payment and initial closing costs, but anticipate handling a somewhat higher loan balance further down the line, may thus be able to better budget for recurring costs in the future.

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