When you come across a favorable mortgage offer, you may think, “Great! I can afford my dream home.” You may be able to, but the costs associated with buying a home go beyond the mortgage payment. To determine how much house you can afford, it’s important to factor in additional expenses, such as closing costs, insurance and taxes, before committing to a mortgage.
Complete costs of buying a home
Ross Hester and Matt Hester, father and son co-founders of The Hester Group, Harry Norman Realtors in Atlanta, Georgia, encourage all of their clients to prepare for the funds needed to purchase.
“If you do not consider all the costs, your monthly expense budget can be flipped on its head,” Matt Hester says.
These costs include:
The down payment is the part of the home’s purchase price you pay upfront, rather than financing it through a mortgage. If you’re buying a $200,000 home, for example, and put 10 percent down, or $20,000, you’d be getting a mortgage for $180,000.
If you choose a conventional or FHA loan, a down payment is required. The amount of the down payment that’s needed is based on the home’s price and property type, as well as the loan product.
For a conventional loan, exactly how much depends on the lender and loan type — you might put down 3 percent, 10 percent, 20 percent or more. With an FHA loan, you may be able to put down as little as 3.5 percent.
It’s important to note that there are loans without a down payment requirement: USDA loans, for borrowers buying in designated markets (generally rural), and VA loans, for eligible service members and veterans.
To close on your home loan and get the keys to the property, you’ll need to pay closing costs, which are all of the fees associated with the mortgage. These range typically from 2 percent to 5 percent of the loan principal, and can include:
- Application fee
- Appraisal fee
- Credit check fee
- Origination and/or underwriting fees
- Title insurance
- Title search fee
- Transfer tax (if applicable)
“There are a number of standard closing table items for which the actual cost will vary based on the value of the home and also the partners you work with,” Ross Hester says.
If you’re lean on savings, however, many lenders offer a no-closing-cost mortgage option, in which the closing costs are added to your loan principal, or otherwise paid for in the form of a higher interest rate. Both save you from having to bring cash to the closing upfront, but can cost you more in the long run, especially if you intend to stay in the home long-term.
In most places, your city or county government requires you to pay property taxes on your home for as long as you own it. Typically, property tax is included in your monthly mortgage payment, but separate from the interest and principal.
For instance, if you own a home with an assessed value of $100,000, and the tax rate is 2 percent, your annual property tax would be $2,000, paid in $167 increments added to each of your 12 monthly mortgage payments throughout the year.
Keep in mind that the assessed value is not the same as the price you paid for your home. If home values go up in your area, your city or county could assess your home at a higher value, meaning you’ll pay more in property tax.
Homeowners insurance protects you financially from unexpected events that damage your home, such as natural disaster, theft or vandalism. Though homeowners insurance isn’t required by law, most mortgage lenders require it in some form. The cost significantly varies, and there are many options, so it’s best to compare offers to keep the expense as low as possible.
Depending on your loan type, PMI may be required if you put less than 20 percent down on your home. This kind of insurance protects the lender if you default on the loan, and can considerably increase your mortgage payment. According to the Urban Institute, annual PMI premiums range from 0.58 percent to 1.86 percent of the loan amount. Based on those rates, with a $180,000 mortgage, your annual PMI cost could span $1,044 to $3,348.
PMI isn’t permanent, however. As you pay down your mortgage and build equity in your home, you can get rid of PMI.
If you’re buying a condo or another kind of home in a community overseen by a homeowners association (HOA), you’ll likely be required to pay a monthly fee, known as an HOA fee. HOA fees are determined by the association, and highly variable. These funds go toward the services the association provides, which may include security, a pool or gym and landscaping and maintenance.
HOAs can also charge occasional assessment fees for urgent repairs. These financial obligations may be overlooked when buyers tally up the costs of buying a home, but they add up quickly.
Home maintenance, repairs and utilities
No matter where you live, you’ll need to plan for home maintenance and repairs. Wear and tear happens, so it’s important to have extra funds on hand for repairing or replacing appliances and major structures and systems, such as the roof or HVAC.
Many experts recommend budgeting 1 percent of your home’s value for home maintenance each year, as well as maintaining an emergency fund to address urgent, non-budgeted concerns as they crop up.
You’ll also need to pay for utilities, likely including water, sewer, gas and electricity. These costs vary according to location, but the general rule of thumb is the larger the property, the more utilities will cost.
The costs of buying and owning a home can add up quickly, so it’s important to prepare. You’ll want to save money, improve or maintain your credit and compare lenders to get the best mortgage rates possible.
“When it comes to determining their budget based on their individual situation, lenders, accountants, financial planners are the folks I recommend buyers reach out to,” says Matt Hester.
Featured image by sturti of Getty Images.