Costs of Buying a House
When you buy your first home, your upfront costs are more than the down payment. Though most first-time homebuyers are prepared for the down payment, other costs don’t get as much air time. Below are the costs you should be prepared to cover before you start looking for a home.
Down Payment Amount
This is typically the largest expense of home buying, but it comes with some good news. The money you use in your down payment becomes equity in the house. That means that your $10,000 down payment means you own $10,000 worth of the property. Your equity grows as you pay your mortgage, with the portion that goes to the principal gaining equity.
Depending on the type of loan you use, your minimum down payment should be at least 3.5 percent of the home purchase price. Keep in mind that, for most loan types except VA loans, if your down payment is less than 20 percent, you will have to pay for private mortgage insurance (PMI). This cost will be added to your monthly mortgage payment.
To save on private mortgage insurance, you should look into a Federal Housing Administration, aka FHA mortgage—private mortgage insurance premiums are typically less expensive than with a conventional mortgage.
Earnest Money
When the seller accepts your offer, you pay earnest money upfront to proceed to the next steps in the buying process. Your earnest money shows that you are serious, and you’re moving forward with the purchasing process.
The earnest money is held in an escrow account. The amount you deposit is typically one to two percent of the home price. Your earnest money eventually becomes equity in your home after closing.
Cash Reserve Requirements
Your mortgage lender will want to see that you have some cash reserves to cover your monthly payment in case something goes wrong. How many months worth of reserves depends on your lender. Two to three months of your mortgage payment is typical. Your lender will want to see the reserves in a savings account.
If you buy a home that comes with a homeowners association, you should also be prepared for HOA fees with your cash reserves.
Taxes
When you buy real estate, your lender will collect the first few months of your property tax payments right away. Be sure to leave room in your budget to cover these costs. You can find an estimate of your taxes through a site like Zillow or Trulia, but your lender will give you an accurate estimate.
Depending on the taxes in your area, you can expect to pay a few hundred to a few thousand dollars in property taxes.
Fees
Unfortunately, there are a lot of fees involved when buying a house. And it’s not just your lender, your real estate agent wants a cut too. Added together, the typical cost of fees for a home purchase is between two and five percent of the home purchase price. Common fees include:
Home Insurance
In order to fulfill your mortgage obligations, you will need to purchase a homeowners insurance policy. There are several types of homeowners insurance that you can choose from depending on the type of property you buy.
When it comes to home insurance, the more extensive the coverage the more expensive the policy. However, the better the coverage, the less expensive the claim. Be sure to check out the best and worst home insurance companies.
And don’t forget to shop for your policy with Insurify. One form gets you 6+ quotes from top home insurance companies. Get the best rate for your home today!
Title Insurance
Title insurance is a very important part of buying a home. While title issues are rare, they’re always very costly. Title insurance costs anywhere from $300 to $1,000. You can usually find the best deal on title insurance by bundling the lender’s policy with the owner’s policy.
Inspection Costs
When you invest a few hundred thousand into a house, you want to be sure you’re making a sound investment. Paying for a home inspection can save you thousands if a problem is uncovered.
For example, if a home inspector uncovers termite damage, you can ask for a reduction in the home price or walk away from the deal. Termite damage costs the average homeowner $3,000 according to Home Pest Control. If you are buying in a high-risk area, be sure that your home inspector does a full pest inspection or hire a specialist in addition to the regular home inspection.
Below is a list of common specialized inspections you can get for your home in addition to the regular inspection.
Costs Source: HowMuchIsIt.org
Home Warranty
Home warranties are a special product you can use to cover systems like HVAC and plumbing. When you first buy a home, a home warranty can help you cover a breakdown of something expensive for a low cost. But not all home warranties are worth it!
Be sure you choose a warranty that does this or your claims for repairs may be denied. Additionally, read the terms and conditions carefully. For example, some warranties cover plumbing fixtures, but not the pipes in the walls. If a pipe bursts in the wall, you’ll be stuck with the bill and the home warranty premium.
Be sure you know what you’re getting for your money.
