Buying a home is the American Dream and it is also the largest purchase we will make during our lives. Buying a home isn’t quite as simple as having a down payment and getting a loan. There are several pieces to the puzzle, especially when you are obtaining a mortgage. The goal in this post is to touch on the most common costs so that you are well prepared and know about how much it’s going to cost to get into a home.
The first thing I want to mention is that buyers do not pay their real estate agents a commission. The seller of the home is the one who pays the selling commission that is split between the buying and the selling agents for a transaction. That being said, there are a lot of different fees for buyers that come together for your closing costs.
Let’s take a closer look. I like to break the costs up into 4 categories based on when you actually have to have the money:
- Down Payment
- Earnest Money Deposit–this is the money you put down when you are making an offer. Typically 1% or so of the offering price, but if you are in a competitive market, you may put more money down to show the seller that you are serious. When writing the contract, you can put certain contingencies in the contract such as home inspection and financing contingencies–basically you can get out of the contract and get your earnest money deposit back within these contingency deadlines. Otherwise, if you don’t follow through with the contract, then the seller gets to keep your earnest money deposit.
- Down Payment–this is the down payment on the entire purchase. This isn’t due until closing time and your earnest money deposit counts towards this. It is worth mentioning, that if you put 20%, you shouldn’t have to pay any mortgage insurance premiums. You can put less than 20% down, but you will usually have mortgage insurance costs on a monthly basis. Talk with your lender because there are so many different lending options available.
- Up Front Costs–you pay these after you have a contract, but before closing. These costs are the ones that you cannot get back if you do not make it to closing.
- Appraisal–if you are getting financing, you will be required to have an appraisal because the lender is not going to lend you money on a house that costs more than what it is worth. If the appraisal comes back for less than the contract price, then you will have to make some adjustments in either price or more money down to meet the lender’s requirements. If you have a contingency built in, then this is where you can walk away as well.
- Home Inspections–even if the lender isn’t requiring a home inspection, most people want a thorough inspection to know what they are actually buying. Some insurance companies require certain reports from the home inspection in order to obtain insurance as well.
- Surveys of the land–this depends on the type of property
- Closing Costs–these are the most shocking costs that buyers face. There are so many different things that need to happen in order to transfer ownership. These differ from state to state and typically range from 3-4% of the sales price of the home. Some of these costs may include the following:
- The remainder of your down payment
- Title search fees
- Initial escrow amounts like a year’s worth of homeowners insurance and/or half a year’s worth of property taxes
- Transfer taxes–city, county, state, any special assessments
- Lender costs–all fees associated with getting the loan which includes the commission for the lending agent, credit checks, document processing fees, etc.
- Settlement agent representation fees–these are the people preparing the settlement documents between the buyer and the seller.
- Monthly Costs–this is what your monthly payment will consist of which is PITI (Principal, Interest, Taxes, Insurance)
- Loan–PI–this is the monthly payment for the term of your loan. If you have a fixed rate and term, such as a 30 year fixed loan, then your P&I stays the same for the life of the loan. You don’t have to worry about inflation, because this is fixed.
- Escrow–TI–this is your annual taxes and insurance. These items do change on an annual basis and your mortgage company typically ‘escrows’ this and pays it on your behalf. This way you are paying a little every month, then when your annual insurance or semi-annual property taxes are due, then money is in the escrow account and the lender pays this directly. Each year, you will get a notice of how much the taxes and insurance are estimated to increase and the TI portion of your monthly payment goes up a little.
- Association Fees–these are HOA (Homeowners Associations) or Condo Fees. Your lender does not escrow these payments, you will pay these directly to the association
- Maintenance & Repairs–you’re a homeowner now, so this means you will have to maintain the property yourself and fix anything that breaks
Hopefully this information gives you a better idea of what home ownership costs. There’s a lot of other information that comes into play with these costs and planning to prepare for these.
If you need help navigating one of the biggest purchases in your life, please schedule a call and see how we can help.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Alabama, Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.