Buying a new home can come with many costs, fees, and financial decisions along the way. On top of the home’s initial price, these figures can add up quickly.
Potential buyers may face extra expenses at each step in the process. For example, they may have to deal with not only the purchase price and mortgage payments but also attorney fees, mortgage insurance, and paying for mortgage points to lower their overall payments. Then, after-purchase costs can kick in, including paying for upgrades or renovations, homeowners’ association fees, taxes, and more.
Below, prospective homebuyers can find a comprehensive overview of essential expenses to consider when purchasing a home.
Upfront costs
The expenses involved in buying a home start well before you sign the mortgage. A homebuyer, for instance, will typically pay for a home inspection to ensure they don’t find any surprises after the purchase. The lender will also require an appraisal to assess the house’s market value and ensure the loan amount matches the property’s value.
Before closing, a buyer may also make an earnest money deposit to show the good-faith intention of buying the house, allowing the seller to take it off the market. Some banks may also require homebuyers to show they have some cash reserves on hand so they’re not totally wiping out their bank account and putting future mortgage payments at risk. Planning ahead of time for these costs and saving up for a down payment will make the whole process smoother and less stressful.
Down payment and financing
For years, common wisdom has told buyers to prepare 20% of the home’s price in down payment costs. But that number isn’t a requirement and isn’t always accurate.
Lately, down payments average about 14% of a home’s total costs. Some first-time buyers can put down much less, as little as 3% or 4%, with certain federal loan assistance programs. Closing costs – various charges required to finalize the sale – can range from 3%–4% of the house’s price. If you’re unprepared, those numbers can add up to a lot of money due at signing.
Different types of loans may also offer various down payment and financing benefits. For instance, conventional loans allow buyers with good credit to offer lower-than-average down payments. FHA loans have down payments as low as 3.5%, and other government-backed mortgages, like VA loans, require a 0% down payment. On the other end, a so-called jumbo loan allows buyers with great credit to purchase a bigger home, but it can require a larger down payment of 10%.
Consider the loan you’ll most likely apply for when saving for a down payment. Setting a savings goal ahead of time can prepare you for the costs involved. If a savings plan alone is insufficient, the homebuyer might consider down payment assistance programs, which come in the form of grants or loans, or look for other alternative funding options.
Closing costs
Closing costs are all the fees, services, and charges that are involved in closing the sale. They can vary by state or type of purchase, but they often range between 3%–6% of the loan amount. Here are some common closing expenses.
Application fees
These are the fees that banks charge to start a loan application and begin the process.
Appraisal costs
Lenders will want to see that the house is worth at least as much as the loan they’re offering, and buyers are usually responsible for the bill.
Inspections
Appraisals are mostly mandatory, but the buyer can opt to pay for inspections to make sure the home is in good condition, and that repairs don’t surprise them upon moving in.
Title search and insurance
A title search is necessary whenever buying a home that isn’t a new construction. It will verify that there are no liens or problems with the property ownership that might hamper the sale. Title insurance protects the lender in case there are any issues with ownership after the sale.
Some closing costs can be negotiated between the buyer and lender. Application fees, the purchase of mortgage points, or the real estate commission are often up for bargaining. The appraisal and title search fees, however, are usually hard numbers.
Ongoing costs
Even though closing costs may be finished, there are still ongoing costs to brace for during homeownership. These costs may depend on how much equity you purchase upfront. For example, private mortgage insurance is a required expense for conventional mortgages if you’ve paid a down payment of less than 20%.
Mortgage payments, property taxes, homeowners’ insurance, and regular maintenance and renovation expenses should be a part of any homebuyer’s budget. It’s crucial to plan for these things before the cost of a new home puts long-term financial stability at risk. Without a solid budget, homebuyers can risk major pitfalls, such as payment delinquency or foreclosure.
Luckily, plenty of tools and strategies exist for managing ongoing expenses, including setting up automatic payments, establishing an emergency fund for unexpected repairs or disasters, and exploring energy-efficient upgrades to the property that may reduce utility bills.
Additional considerations
Even with everything planned out, life happens, and other expenses pop up. A new home may require paying rising homeowners’ association fees, new utility costs, and covering potential renovations and upgrades. Buyers should conduct their due diligence and research to anticipate future expenses and make informed decisions about the long-term affordability of the property. Budget calculators, financial planning guides from banks, and budgeting apps can help homebuyers navigate the complexities of homeownership costs and plan for a successful future.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
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