Buying a house is one of the most significant financial commitments you’ll make in your lifetime. Know The True Cost of Homeownership.
A milestone
Buying your first home is a huge milestone, often representing a step toward stability and long-term investment.
If you are in the process of becoming a first-time homeowner, you’ve probably already done some research on the basics.
But have you considered all the costs of buying a home?
Many prospective buyers focus on the price of the house itself, but fail to account for other essential expenses, such as closing costs, insurance, and ongoing payments, all of which play an integral role in how much you need to save for a house.
Understanding these additional costs is key to ensuring you are financially prepared for the homebuying process.
In this quick guide, we’ll walk through the major expenses involved in purchasing a home so you can feel ready to take on the responsibility of homeownership. From upfront costs to ongoing payments, let’s explore everything you need to know about the cost of buying a house.
Upfront Costs: What to Expect
The homebuying journey requires several payments before you even set foot inside your new home. Let’s discuss the primary upfront costs you’ll encounter:
1. Earnest Money
One of the first costs you might face is the earnest money deposit, sometimes referred to as a good faith deposit. This is paid to the seller to show that you are serious about purchasing the home. If the deal falls through due to reasons outside the agreed-upon contingencies, the seller may keep the earnest money to cover potential losses.
Typically, this deposit ranges from 1% to 3% of the home’s selling price. Fortunately, when the deal is finalized, the earnest money will be applied toward your down payment.
2. Down Payment
The down payment is one of the most significant costs when buying a home. This is a percentage of the house’s price paid upfront, reducing the amount you’ll need to borrow via a mortgage. Generally, down payments range from 3% to 20%, depending on the type of mortgage.
A larger down payment reduces the risk for lenders and may eliminate the need for Private Mortgage Insurance (PMI), which is usually required for down payments below 20%.
3. Closing Costs
In addition to your down payment, you’ll also need to cover closing costs, which are fees associated with the final stages of the homebuying process. These fees range from 3% to 6% of the home’s selling price and include expenses such as title searches, credit reports, appraisals, and attorney fees.
While closing costs can vary, it’s important to prepare for them alongside your down payment to avoid surprises on closing day.
4. Homeowners’ Insurance
Most mortgage lenders require you to have homeowners’ insurance in place before they approve your loan. This insurance protects your property against damage or theft and typically costs between $500 and $2,000 annually, depending on factors like the age of the home, its location, and additional features like swimming pools or fireplaces.
Homeowners’ insurance provides peace of mind, ensuring that your investment is protected in case of emergencies.
5. Agent Commission
While in the past it was common for sellers to cover the real estate agent commission (usually around 6% of the home’s price), The National Association of Realtors (NAR) rules for commissions have changed, so tread carefully. It’s now important to have clear communication with your agent and the seller about who is paying the commission to avoid unexpected charges.
6. Moving costs
Finally, don’t forget the cost of moving into your new home.
Whether you hire professionals or do it yourself, moving can involve paying for moving trucks, storage units, and even temporary accommodation if you’re moving long distances. These costs, while often overlooked, should be factored into your overall budget.
Ongoing Fees: Financial Commitments After Purchase
Even after closing on your house, the financial responsibility of homeownership continues with several ongoing fees that are part of maintaining your home:
1. Monthly Mortgage Payment
Unless you’ve paid for your home outright, you’ll make monthly mortgage payments. What is a mortgage? A mortgage is a long-term loan that allows you to pay for the house over 15 to 30 years, depending on your loan terms.
Your mortgage payment will be influenced by factors such as your interest rate, loan type, and down payment. If your down payment was less than 20%, you’ll also need to pay PMI until you have at least 20% equity in the property.
2. Property Taxes
Another ongoing cost is property taxes, which are determined based on the assessed value of your home and the property tax rate in your area.
These taxes fund local services such as schools, fire departments, and public parks. Be sure to keep in mind that property taxes may increase over time due to factors such as real estate market changes or local infrastructure projects.
3. Homeowners’ Association (HOA) Fees
If your new home is part of a community governed by a Homeowners’ Association, you may be required to pay monthly or annual HOA fees.
These fees typically range from $200 to $500 per month and go toward maintaining common areas, landscaping, and community amenities like pools or clubhouses.
4. Maintenance Costs
Owning a home comes with the responsibility of maintaining it. Routine maintenance is essential to keeping your property in good condition.
Experts recommend setting aside 1% of your home’s value annually for maintenance costs, plus an additional emergency fund for unexpected repairs such as broken appliances or roof damage.
The Bottom Line
With so many expenses to consider, you may be wondering just how much to save for a house. Considering everything above, you should aim to save at least 20% of the home’s price to cover the down payment, along with an additional 3% to 6% for closing costs.
All in all, experts say that you should save about 25% of the home’s price.
Conclusion
By accounting for both upfront costs and ongoing fees, you can ensure that you’re financially prepared for the journey of homeownership. Properly planning and saving wisely will give you peace of mind as you transition into this exciting new chapter of life.
