There are many financial benefits of buying a home rather than renting. Mortgage payments can help you build equity over time, and that equity can be used to make future purchases.
However, there are also a number of upfront costs that come with homeownership that should be considered before making the leap to home ownership. Some of these are predictable, like closing costs and property taxes, while others are less so.
1. Down Payment
Your down payment is a significant chunk of money that you pay upfront when buying a home. It demonstrates to your lender that you are financially committed to homeownership and reduces the amount of risk that they take in lending you money for your new home.
It’s important to save up enough for a down payment and to identify the best mortgage lender in advance. You should also do your research on the local market, check your credit rating, minimize your debt and set aside cash for closing costs (which typically run 3% – 6% of your purchase price). All of this work should be completed before you even step foot into an open house. It will make it easier to lock in a great interest rate when the time is right.
2. Mortgage Payments
The bulk of the cost of buying a home is typically the mortgage payment. This includes the principal and interest as well as property taxes and homeowners insurance. Many buyers may also be liable for homeowner association fees if they move into a community with them.
Closing costs can run from 2%-5% of the purchase price and include one-time charges such as a credit report fee, flood determination and certificate, inspection fee, title search, pest inspection and survey. Buyers will also likely need to pay a lender origination fee and discount points, which are prepaid interest on the loan.
Ongoing expenses include utilities, maintenance and any homeowner association fees. A variety of factors can impact these costs, including location and size of the home.
3. Property Taxes
The property taxes you need to pay will depend on the location and value of the home you’re purchasing. These funds are used by local government for initiatives like schools, parks and roads. They’re an ongoing cost and can add up over time.
The good news is that a mortgage servicer will typically collect these expenses upfront and save them in an escrow account to be paid with your monthly mortgage payment. You can get a rough estimate of these fees in the loan estimate and
closing disclosure you receive from your lender.
Getting to know the less obvious costs of homeownership can help you decide where you want to purchase your next house. Use tools like Zillow’s affordability calculator and search by monthly cost tool, as well as apps like Felix to help you make the most of your home buying journey.
4. Homeowners Insurance
Homeowners insurance protects you and your mortgage lender from financial losses related to property loss and liability. Your mortgage lender will usually require you to have homeowners insurance before lending you any funds for your home purchase. Homeowner’s policies typically cover a dwelling, other structures such as sheds or garages, and personal property on the property. Some policies also include “ordinance or law” endorsements that pay for the cost to bring a property up to current building codes and standards enacted after construction.
The amount of homeowner’s insurance you need will depend on several factors, including the number and type of structures you want covered and your claims history. You can get a good idea of the amount you’ll need to budget by reviewing the initial Loan Estimate (GFE) and the closing disclosure you receive three business days before your scheduled closing. Be sure that you understand the difference between homeowners insurance vs. home warranty.
The costs associated with buying a home don’t end when you move in. You will still need to pay utilities, property taxes and homeowners insurance, as well as take care of maintenance needs and repairs.
It is important to keep in mind that these costs will vary based on where you live, the size of the home and the type of property. It is also recommended that you talk to a local real estate agent about these expenses and budget accordingly.
In terms of recurring costs, Angi estimates that homeowners will need to set aside 1 to 4 percent of their home’s value each year for maintenance expenses. This includes things like utility bills (electricity, water, heat and internet), landscaping and any homeowner association fees.