Buying your first house is a huge milestone. If you’re currently searching for your dream home, it’s fair to guess that you’ve taken the time to prepare for some of the obvious costs of buying one, like mortgage payments for the price of the home itself and the down payment that goes along with it.
There are other underlying fees to prepare for, though, that many people don’t know about until they start the homebuying process. If you’re not aware of the extra costs that come with this type of purchase, you may find yourself financially unequipped to handle them.
Below, we walk you through the main costs of buying a home to ensure you feel ready for all that is involved in the homebuying process.
The Main Costs of Buying a Home
You may be aware of some of the costs of buying a home, but you’d most likely be surprised at just how many additional fees you’ll be responsible for. Let’s explore some of the upfront costs as well as some of the further fees that come with buying your first home.
Upfront Costs
1. Earnest Money
Earnest money, also known as a good faith deposit, is one of the first costs you’ll encounter when buying a home. Earnest money is paid to the seller before the closing even happens to demonstrate your seriousness about purchasing the home. When a buyer and seller enter into a purchase agreement, they must take the house off the market — if the deal falls through for an unexpected reason not included as a contingency in the contract, the earnest money will protect them from the financial stress of relisting and starting the selling process over again.
Earnest money amounts can vary, but usually fall somewhere between 1% and 3% of the selling price. Once you close on the house, the money will be put toward your down payment.
2. Down Payment
A down payment on a home is a decided percentage of the selling price that is paid upfront to cover a portion of the purchase before a mortgage. It’s one of the largest upfront costs you’ll have to pay, but it protects both the buyer and the lender (and decreases the amount you’ll have to pay on your mortgage).
By putting a down payment on your mortgage, you’re proving that you’re likely to pay back the mortgage in full since you’ve put a large sum of money into it already. You’re also minimizing risk for the mortgage lender, who would have to foreclose if you stopped paying your mortgage altogether. The bigger the down payment, the less stress for everyone involved.
A down payment may range from 3% of the house’s price up to 20%, depending on your mortgage program. Some mortgage programs don’t have a down payment at all. Keep in mind that the industry standard is a 20% down payment to avoid the need for Private Mortgage Insurance, or PMI (PMI is usually required if your down payment is less than 20%).
3. Closing Costs
Though you’ll likely put down a large sum of money on closing day through your down payment, you’ll have a list of other fees to pay before the house is yours. These closing costs typically range between 3% and 6% of the house’s price and cover setting up your mortgage loan as well as any other services that happen before your real estate transaction is final. These costs can include credit report fees, title fees, origination fees, appraisal fee, and home inspection fees, an upfront mortgage insurance payment (if you’re receiving a government loan), and money added to your escrow account.
4. Homeowners’ Insurance
To apply for a mortgage, you’ll most likely need to purchase homeowners’ insurance. This kind of insurance protects your property in the case of natural disasters, theft, or vandalism, and mortgage lenders almost always require it. Homeowners’ insurance is usually flexible, allowing customized plans to meet your needs, but at a base level, it’s designed to protect your assets and your home in the case of a disaster so most or all the costs will be covered.
Rates for homeowners’ insurance vary greatly because of the many unique factors of each home. Wood-burning fireplaces, swimming pools, age of the home, or level of coverage needed can affect the price of your homeowners’ insurance. According to NerdWallet, $300,000 of coverage would cost you an average of $1,915 a year.
5. Agent Commission
In general, real estate agents are each paid 3% of the home’s price, so the buyer and seller’s agent together add to a total payment of 6%. In the past, it’s been common practice for sellers to cover this cost, but they usually increase the property listing price accordingly.
However, this might not always be the case moving forward. The National Association of Realtor’s (NAR) rules for commissions have changed as part of a lawsuit settlement. Under the new rules, buyers and their agents now have the responsibility to discuss and sign a written contract disclosing a real estate agent’s fee. While real estate commissions have technically always been negotiable, the new rule shifts responsibility to buyers to discuss compensation.
Be sure to communicate with your agent and the seller about who will be paying the agent’s commission so you don’t find yourself in charge of an unexpected payment.
6. Moving
Moving can be expensive, and no matter if you move yourself or hire professionals to move your belongings for you, you’ll have to make room in your budget for the moving process. This can involve payments for storage units, moving trucks, moving professionals, and even a place to stay if you’re moving long-distance and need to sleep overnight for your drive.
Ongoing Fees
1. Monthly Mortgage Payment
Unless you’ve paid for your home in cash, you’ll be making mortgage payments each month. A mortgage is a long-term loan from a lender that allows you to pay back the cost of the house over an agreed-upon period (usually 15 or 30 years). Depending on the purchase price of your house, your mortgage interest rate, and your loan type (adjustable, fixed, balloon, etc.), the monthly payment will look different. Additionally, if you paid less than 20% as a down payment, you’ll have to purchase Private Mortgage Insurance (PMI). PMI protects the lender in the case that you suddenly are unable to make your monthly mortgage payments. After you have 20% equity in your home, you’ll be able to drop your PMI.
2. Property Taxes
Another cost of owning a home is property taxes. These taxes are charged for property owners in your area and contribute toward running the local government (think schools, fire and police departments, and parks). You’ll be charged based on the assessed value of your home and your area’s property tax millage rate. This number varies per area and may change over time. Similarly, your taxes may increase over time for factors such as home value increase, real estate market fluctuation, or local road repairs.
3. HOA Fees
It’s common for neighborhoods, condos, and apartments to operate under a homeowner’s association (HOA) that provides services for the community like amenities or events. Since running an HOA requires money, residents are usually charged a monthly HOA fee that covers part of that cost. HOA fees commonly range from $200-$500 but may be different depending on your association.
4. Maintenance
Maintenance is part of being a good homeowner. Wear and tear can happen to every property, and sometimes emergencies happen that you should be prepared for. Flooring replacements, broken windows, roofing repairs, and a myriad of other issues may occur, so it’s a good idea to budget one percent of your home’s value for maintenance each year, in addition to tucking away an emergency fund for urgent situations that may arise.
How Much to Save for a House
So, you’re building your budget to prepare for the big purchase. But do you know how much to save for a house so you’re ready for your closing day?
We recommend saving 20% for a down payment as well as your 3-6% closing costs. This means you should be prepared to pay about 25% of your home’s price when you finalize your purchase. These upfront costs are important to be ready for so you can save the correct amount for your closing day.
Conclusion
If you’re a prospective home buyer, all the above costs should be included in your budget so you can accurately assess whether you’re prepared for the financial responsibility of buying a house. Budgeting for such a large purchase can be overwhelming, but by being aware of the fees you’ll be charged, you can save wisely to fully prepare for your first-time homebuying journey.
