Homeownership is a big responsibility and comes with many costs that buyers need to consider. A mortgage is just one of them.
These costs can add up quickly, making a home that seems affordable on paper actually pricey in reality. Here are 5 expenses to budget for when buying a home:.
- Closing Costs
While the down payment is top of mind for many first-time buyers, there are a number of other upfront costs to consider as well. These include the closing costs, which can add up to 2% to 6% of the total purchase price of the home.
Closing costs are lender and third-party fees paid at the end of a real estate transaction. These include an appraisal fee, home inspection, mortgage origination and application fees, a
mortgage broker fee, title search and recording costs and prorated property taxes and homeowners insurance.
Buyers typically pay most of the closing costs, but some can be negotiated into the sale contract as a seller credit or even rolled into the mortgage loan. Choosing the right lender can help you minimize these fees.
- Down Payment
One of the biggest upfront costs involved with buying a home is the down payment. Typically, you need to put at least 20% down to avoid paying PMI on your conventional mortgage.
Saving up a down payment takes months, if not years of disciplined savings. However, focusing too much on this number can leave you short in the future when it comes to other financial goals.
A large down payment demonstrates your financial commitment to your purchase and helps you build equity faster. Plus, it reduces the risk for your lender, allowing them to offer better loan terms and lower interest rates. That’s why it’s important to make sure you’ve saved enough money for a down payment before you start searching for homes. You don’t want to be caught off guard by unexpected expenses down the road.
- Home Inspection
A home inspection is one of the most important costs when buying a house. It allows you to spot problems that could be expensive to repair and gives you peace of mind that your new investment is safe. Look at your home warranty options and make sure you have a good plan in place.
A general home inspection cost is $300 to $500. However, the fee can be higher if lab testing or special equipment is required, such as earthquake strapping on water heaters. The fee can also increase if the house is older, or if the inspector needs to travel long distances.
If the home inspector finds serious issues, buyers may choose to request a price decrease or credit on the purchase. They may also ask the seller to make the necessary repairs before moving in. This can save you money and shorten your to-do list after moving in.
- Property Taxes
Property taxes are another ongoing home expense that buyers need to consider carefully as they shop around. These taxes are calculated based on the value of a house and its imposed tax rate. Fortunately, most mortgage lenders incorporate these payments into homeowners’ monthly mortgage bills and hold them in an escrow account until the tax bill is due twice per year.
In some states, Frank says, lenders require that buyers deposit an entire year’s worth of property tax payments into their escrow accounts at closing as a buffer to ensure they have enough money to pay their tax bills when they are due. This can be a significant financial hit for homebuyers.
- Maintenance
Getting preapproved for a mortgage is a key first step in buying a home, but homeowners need to save for other recurring costs as well. These include homeowners insurance, property taxes and maintenance expenses.
Maintaining a new home isn’t cheap, and it can be especially expensive for those moving from rentals where upkeep was handled by someone else. That’s why 34% of homeowners say they were not fully prepared for the cost of home ownership when they bought their home.
It’s generally recommended that homeowners set aside between 1 and 4 percent of their home’s value every year to cover these maintenance costs. While estimating these costs can be difficult, having money saved in advance can help avoid buyer’s remorse down the road. This is why having a home warranty is important.
