Buying a home offers many benefits, including building equity and increasing your net worth over time. It also provides a sense of permanency and community.
However, there are several costs to consider when deciding to buy a house. Understanding these costs can help you make a more informed decision.
1. Down Payment
Down payments are a big part of the homebuying process. They demonstrate to lenders that you’re committed to homeownership and are less likely to default on your mortgage loan.
However, saving up enough for the customary 20% down payment may take years. Plus, you’ll have to pay closing costs and other homeownership fees that can add up quickly.
So, it’s important to carefully consider your options. If you put less than 20% down, you’ll need to pay private mortgage insurance (PMI). This typically costs between $30 and $70 per month for every $100,000 borrowed. You might find it’s more cost effective to save up for a larger down payment and avoid PMI altogether. Your lender can help you figure out the right strategy. You can also look for grants and other programs that offer assistance with down payments.
2. Mortgage Fees
The biggest cost of buying a home is typically the mortgage loan. This is why buyers need to consider their preapproval letter and determine what they can afford based on their income, expenses and debt payments.
These fees cover the cost to create and process your mortgage, including an origination fee, an underwriting fee and an appraisal fee. Some lenders also charge an application fee, which covers the cost of a credit check.
You might also need to pay a survey fee, an escrow deposit and a transfer tax. Some lenders allow borrowers to shop for their own title insurance company and home insurer, which helps reduce these costs. You can also choose to buy discount points in order to lower your interest rate.
3. Closing Costs
Closing costs are fees charged when you close on your home purchase. The lender typically gives you a loan estimate that lists closing costs, which can include government recording fees, mortgage points, attorney’s fees and escrow fees. The buyer and seller can share closing costs or the buyer can pay all of them.
Other closing costs may include an appraisal fee and a title search, which is when a company reviews property records to make sure the seller has clear ownership of the home. You also have prepaid expenses, such as two months worth of
homeowner’s insurance and property taxes.
These payments are made at closing and held in an escrow account until you move in. The money is then paid out to the appropriate parties.
4. Homeowners Insurance
Homeowners insurance provides liability coverage for homeowners and typically covers the cost of rebuilding or replacing a house if it’s destroyed. Most mortgage lenders require this insurance.
Homebuyers also need to consider how much they can afford to spend on a home by assessing mortgage rates, their down payment amount, their income and debt levels and household expenses. NerdWallet’s home affordability calculator can help.
When viewing properties, it’s important to take into account a location’s safety and convenience factors like its proximity to schools, grocery stores, job hubs and public transportation. A property’s condition is another factor to consider, such as how old it is or whether it has issues like poor tiling or water damage. These issues could be costly to fix. Some insurers offer an HO-3 policy with an ordinance or law endorsement that covers the additional cost of complying with new building codes or local laws that were enacted after the house was built. A warranty for home coverage is different from homeowners insurance so be sure to understand the two and know that both are equally important to have.
5. Utilities
Unlike renters, homeowners must pay for electricity, gas, water, waste removal and possibly internet. Be sure to factor these costs into your budget when looking for a home. Your real estate agent can often help you obtain the past year’s utility bills for a prospective home to give you a better idea of what to expect.
Adding these one-time fees and expenses to the purchase price of a new home can make buying your first house more expensive than you might think. But by factoring in utilities, you can determine if the house you want is affordable and identify areas where you can improve the home’s energy efficiency to save money on utility bills for years to come. This is a great way to avoid costly surprises down the road.