What is the Actual Cost of Buying a Home?
It would have been nice if homes came with price tags too so that a buyer could compare ‘all-inclusive’ costs. But just because the online calculator says you can afford a home doesn’t always mean you can. Buying a house includes various costs apart from the down payment and a person should be well informed about those beforehand, else it may put one in a financial crisis.
The many costs included in buying a home can be generally divided between upfront costs and future costs.
1. Upfront costs
Upfront costs, also known as closing costs, include whatever money has to be paid before the buyer actually owns the home. Here, we’ll look at different upfront costs required to buy a home.
1) Down payment: It is a part of the home price that one must pay before applying for a loan (mortgage) to a bank, trust or credit union. It varies depending on the type of financing. A few of the loan options are mentioned below:
- FHA Loans, or Federal Housing Authority, is widely popular mortgage scheme because of the down payment percentage being as low as 3.5%.
- Conventional Loans are another famous loan options for buyers that require only 5% down payment. This type of loan requires higher credit scores of the buyer than a FHA loan.
- VA Loans, or Veterans Administration Loans, which allows 100% finance of the mortgage, is best suited for people looking to buy a home with zero down payment.
2) Property taxes: Taxes you must pay to your municipal government for financing all the community services such as police, fire, road maintenance, public health, school, parks, etc. Property taxes vary widely, depending on the state you are in, with up to 4.2% of the home’s value in some states.
3) Homeowners Insurance: A home insurance is must if you take a mortgage for the home. Homeowners insurance covers rebuilding, repair and replacement costs in the event of a catastrophe such as earthquake, floods, etc. or in case of theft. The cost of homeowners insurance depends on the property and it is suggested to get different quotes before paying for the insurance.
4) Appraisal fee: Appraisal fee is the cost of an appraiser to determine the reasonable market price of your property and protects the buyer from paying more than the worth. The home inspection usually happens within 10-15 days after the contract is approved. When a buyer applies for financing of the property, the bank always require an appraisal to be done. The cost of the appraisal, though not fixed, varies generally from $350 - $500.
5) Inspection costs: These costs include inspecting structural, mechanical, pest and other potential issues in the house to make sure it is in good working condition. The cost of the same again depends on size of the home and other factors.
6) Real estate attorney fee: Your attorney will be reviewing all the contracts and hence, a good professional attorney will make sure to get you a deal in your best interest. The attorney fee generally ranges from $400 - $600 and is worth the money.
7) Miscellaneous fees:
- Government recording charges, the cost of state or local government to record the deed, mortgage and loan papers.
- Credit report fee is the cost that the buyer has to cover for the lender, which he paid to get buyer’s credit report.
- Tax service fee, though a minor fee, ensures previously paid taxes on the house are all in accordance.
- Title services and lender’s title insurance is the fees related to your home’s title.
2. Future Costs
Future costs are the expenses that a new homeowner has to bear after moving into the new home. Most of the times, the buyers neglect to take these costs into account. Here are few of the widely known future costs you must consider while buying a home.
1) Mortgage payment: The monthly loan repayment is calculated by taking into consideration the principal amount, the interest rate and the time the buyer has to pay off the loan. One principle rule, the sooner one pays the principle; the lesser will be the amount to be paid in total.
2) Private mortgage insurance: It is a cost passed on to the buyer as a part of monthly mortgage that protects the lender in case of default. If the down payment of the home is less than 20% of its price, the buyer has to pay PMI. It is recommended to check with the mortgage servicer if the private mortgage insurance can be removed when the mortgage reaches 20% equity.
3) Moving costs: Moving into a new home involves expenses related to packing, storing and transporting. And the costs depend on how far one is moving. If the buyer plans on moving with the help of family and friends, the costs can be negligible. However, if moving across a country, the costs can be steep. On an average, a long distance move of a 2,000-square-foot home, including packaging, may cost $5,000 to $7,000. And if moving nearby, the cost is likely to be less than $1,000.
4) Utility costs: Once a buyer starts living in the home, all the utilities such as water, electricity, gas, heat and air conditioning are put to use. And paying these utility bills on a monthly basis can run up the total costs. One can limit these costs to a certain extent by minimizing the usage, but it is good to have a general idea of how much the utility costs would be.
5) Maintenance and renovation costs: These costs can include painting, repair work in the driveway, cleaning the gutters, fixing some plumbing or electrical wiring, replacing roof shingles, etc. A standard rule of thumb is to keep 1% of the home’s price every year, as a budget for home maintenance costs. The maintenance costs vary depending on the age, size and style of your home, previous owner’s upkeep and the climate.
6) New commodities: If a buyer is purchasing his first home or moving in to a bigger place, he might need to buy extra furniture or home appliances. The idea of filling in the new place, though sounds exciting, however, can actually be quite draining financially.
Even with the luck on one’s side, a buyer may avoid paying PMI, find a low-cost attorney, moves into a home nearby which is very well maintained, paying minimum taxes, still the expenses listed above can add up to thousands of dollars. The idea is not to scare one away from buying a new home, but to enable one to be prepared well before going ahead.