Buying a home is a big investment, but purchase price isn’t everything. Keeping track of the various costs—some obvious, some more subtle—can be a challenge in itself. However, it’s a challenge worth mastering so you know what your total costs will be from month to month—and how they might even change over time. This crash course in home-buying costs can help.
Up-Front Costs: Prepare to Cover These Costs When You Buy
Home inspection. Even if your lender doesn’t require a home inspection, it’s a solid investment. The up-front cost (which averages $324 nationwide, according to HomeAdvisor, a leading online home improvement resource) can give you a clear picture of the home you’re buying and may even give you an opportunity to negotiate with the seller if the inspection reveals any safety concerns.
Down payment. While not required for some mortgages, a down payment helps reduce the monthly mortgage payment and may eliminate the need for Private Mortgage Insurance (PMI), which protects the lender in the event you default on your loan, and they aren’t able to resell your home for enough money to pay off the mortgage. Depending on the loan type and lender, you may need to make a down payment that’s equal to between 0 and 20 percent of the home’s sale price. A down payment also builds instant equity, which may be a source for low-cost borrowing with a home equity loan or line of credit.
Closing costs. This collection of fees necessary to close the mortgage loan can add up quickly. Your lender should provide you with an estimate of how much you can expect to pay in closing costs—typically 3 to 6 percent of the home’s purchase price, according to the Federal Reserve.
Processing fees cover the financial institution’s costs to prepare the loan, including loan origination fees, credit report fees and the cost of the application.
An appraisal fee allows your lender to accurately determine the value of the home to ensure you’re not paying more than the house is worth. The average cost is $300 to $500.
If your lender required private mortgage insurance (PMI), you may be required to pay the first premium during the closing process.
Attorney fees help ensure that all the documentation is set up correctly, which protects you.
Other costs lumped into the closing costs could include survey fees (to determine the property boundaries), title insurance and recording charges (the cost for state and local governments to record your deed, mortgage and loan documents).
Taxes. Depending on when you close and when property taxes are due, you could owe several months’ worth of property taxes at closing. Your loan estimate should include these costs. The taxes are calculated based on your home’s value, which means the more expensive your house is, the more taxes you’ll pay.
Insurance. Most homebuyers are prepared to pay homeowners insurance, but many don’t realize they may have to prepay an entire year’s worth of homeowners insurance when the loan is closed.
Moving costs. Whether you rent a truck yourself or hire a moving service, don’t forget to add those costs to your budget.
Ongoing Costs: Plan for the Long-Term Costs of Homeownership
Mortgage payment. Once you’ve negotiated a purchase price and you know the rate you’ve been approved for, your loan officer can tell you your monthly loan payment. If you select a fixed-rate loan, this payment amount won’t change over time. With an adjustable-rate loan, that payment may shift as the loan’s rate adjusts.
Taxes. You’ll owe property taxes on your home every year, which are based on the value of the property and the taxes levied by your city, county and school district. That means the taxes you owe may change from year to year. Home sellers must share with you the current property tax assessment, and the seller’s real estate agent can provide the previous year’s property tax amount.
Insurance. Homeowners insurance is a must, but you may also need to pay PMI if your down payment is less than 20 percent of the loan amount. VA (Veterans Affairs) mortgages don’t require homeowners to pay PMI, and Navy Federal offers qualified buyers several mortgage products that don’t require PMI, including a 100 percent financing option.* You may also be required to carry flood or other hazard insurance, depending on the home’s location. Talk to your lender and insurance provider about the costs you can expect.