All Of The Costs Associated With Buying A Home
November 4, 2021
Many discussions about buying a house revolve around down payment, credit score, and mortgage payments. You may be able to get a good mortgage offer based on your credit score, but that’s not enough to assess if you can buy a house. There are several other expenses associated with becoming a new homeowner that you need to consider.
In order to get a holistic look at how much a house costs, you’ll need to understand all of the costs associated with buying a home. Luckily, this blog post goes through exactly that.
The Costs of Buying a House
1. Earnest Money Deposit (EMD)
When you buy a house, the owner will ask you to put some money under escrow so that he can put the house under the contract. Putting a house under contract means that the seller has accepted your offer, and both the parties have agreed on a purchase price and other terms of the deal.
This initial amount of money you pay to the seller is called an EMD or Earnest Money Deposit. You can think of it as a means to ensure that you are a genuine buyer. The EMD can be anywhere from 1.5% to 2% of the purchase price that you have agreed upon. The EMD will be adjusted in the closing costs or other expenses involved, once the transaction is finalized.
2. Down Payment
Down payment is one of the most known costs associated with buying a home. The down payment is the amount of money that you have to pay upfront when buying a house. This is the part of a house’s sale price that is not covered by mortgage financing.
The down payment can vary depending on the mortgage for which you are eligible and the house’s sale price. For instance, the minimum down payment for an FHA home loan can be as low as 3.5% of the purchase price of a home. So, if you are buying a home at $200,000 and get an FHA home loan, you have to pay only $7000 in down payment.
To learn more about how down payments work, check out one of our recent blogs here.
3. Closing Costs
Another major one-time expense associated with buying a house is the closing costs. Closing costs are the fees and expenses that you pay a mortgage lender when closing on a home. These can be from 2% to 5% of the principal loan amount.
Here are some of the expenses included in the closing costs:
- Lender’s Title Insurance : Protects the lender from any problems with the title. A one-time payment.
- Attorney Fees: Pays for the real estate attorney that is mandated to be present at closing, depending on your state.
- Pest Inspection Fees: In many states you are required to get a pest inspection and the buyer, seller, or lender will have to pay the expense.
- Transfer Tax: Fees that go to the local government to transfer the home’s title to you.
- Loan Origination Fee: Pays the lender for underwriting and processing of your loan.
For prospective home buyers who are light on savings, no-closing-cost mortgages are one of the best options. By using no-closing-cost mortgages, you get the closing costs covered in the financing albeit at a higher interest rate.
4. Home Inspection Costs
Several first-time home buyers forget to account for expenses like home inspection costs while budgeting, which can become an issue when closing on a home. Home inspection costs are another one-time expense that you need to make as soon as you put in an offer.
Professional home inspectors assess the property’s condition with a focus on the structural and systemic features. The professional will be able to provide you with an assessment of the overall condition of the home, along with any signs of damage or threats. Generally, home inspections cost anywhere from $200 to $400.
5. Property Taxes
Whenever you buy a house, you have to pay property tax to the local government as long as you own the property. Property tax is usually added to your monthly mortgage payment. However, it is separate from your monthly principal and interest amount.
An important thing about property taxes is that they are annually charged based on the assessed value of your house, hence the amount varies every year. For example, if the prices of the properties in your area have gone up, you may have to pay more in property tax.
6. Insurance Costs
Private mortgage insurance and homeowners insurance are two common types of insurances involved with buying a house. Both of them protect you in various unexpected scenarios.
For instance, homeowners insurance is built to protect you in scenarios like natural disasters, vandalism, and thefts that may damage your property and belongings. It is not required by the law to get homeowners insurance. However, mortgage lenders sometimes may ask for it.
Private Mortgage Insurance is generally required in cases where the borrower is eligible for a conventional loan and makes less than 20% in a down payment. PMI does increase the monthly mortgage payment of the borrower, however, it protects the lender in case of a default. So, why do you have to pay for it? That’s because the lender is taking a risk of lending you the money compared to someone who can pay a higher amount in down payment.
7. HOA (Homeowners Association) Fees
Lastly, if you are buying a house in a community overseen by a homeowners association, you will be paying monthly HOA fees. HOA fees go toward the services that the association provides, including landscaping, sports facilities, gyms, pools, and other maintenance costs.
How much you will have to pay in HOA fees varies frequently, and is decided by the association itself.
8. Utilities, Maintenance, And Repairs
Not technically a part of home buying expenses, but expenses nonetheless. Expenses for maintenance, repairs, and utilities will start as soon as you start living in your newly purchased house. When budgeting for your home purchase, don’t forget to take these expenses into account.
The costs associated with buying a home is a lot more than just a down payment and mortgage. While saving money and budgeting is important, knowing how much you will have to pay for the house is equally as important. If you still have questions about the costs or would like to learn more about the home buying process, contact a real estate agent. Agents have expert knowledge on the real estate industry and can provide insights that no one else can.