Buying your first home is an exciting milestone, but it involves understanding more than just the sticker price of the property. There are several costs of buying a home—both upfront and ongoing—that first-time homebuyers should account for to ensure a smooth financial journey. Awareness of these expenses will help you prepare adequately and avoid unexpected financial strain.
Upfront Costs of Buying a House
When starting your homebuying adventure, you’ll immediately encounter several initial costs that contribute significantly to the total cost of purchasing a home.
1. Earnest Money
Earnest money acts as a deposit showing the seller that you are serious about the purchase. This amount, usually between 1% to 3% of the home’s price, is paid before closing. If the deal falls through for reasons not covered by contingencies, this money protects the seller from relisting costs. Once you close, this amount is applied toward your down payment.
2. Down Payment
The down payment is one of the most substantial costs you’ll face. Typically, it ranges from 3% to 20% of the home’s price, depending on the mortgage program. A larger down payment decreases your monthly mortgage and can eliminate the need for Private Mortgage Insurance (PMI) if it’s 20% or more. Ensuring you know how much to save for a house is crucial for budgeting.
3. Closing Costs
Closing costs cover various fees required to finalize your mortgage. Ranging from 3% to 6% of the home’s price, these include credit report fees, title fees, appraisal, home inspection fees, and others. Planning for these ensures you’re not caught off guard during closing.
4. Homeowners’ Insurance
Mortgage lenders typically require homeowners’ insurance to protect your property against unexpected events like natural disasters or theft. The cost varies depending on factors like the age of the home, location, and specific coverages. It’s essential to factor this into your cost of buying a house.
5. Agent Commission
Real estate agents usually earn around 6% of the home’s price, split between the buyer’s and seller’s agents. Though traditionally covered by the seller, recent changes require buyers to discuss and agree on compensation, potentially altering your financial planning.
6. Moving Expenses
Whether hiring professionals or moving yourself, relocation involves costs like truck rentals, storage units, and perhaps even overnight stays if moving long distances. Budgeting for these can prevent last-minute financial hiccups.
Ongoing Costs of Homeownership
After the initial purchase, several ongoing expenses continue throughout homeownership.
1. Monthly Mortgage Payments
Most homeowners will have monthly mortgage payments unless the home is bought outright. The amount depends on factors like loan type, interest rate, and down payment size. If your down payment was less than 20%, PMI will be an additional monthly cost until sufficient equity is built.
2. Property Taxes
Property taxes are essential for funding local services like schools and emergency services. These are based on your home’s assessed value and local tax rates. They can fluctuate due to changes in home value or local government needs.
3. HOA Fees
If your home is in a community governed by a homeowners association (HOA), you might be subject to monthly fees covering amenities and maintenance of common areas. These can range widely based on your community’s offerings.
4. Maintenance Costs
Homes require regular upkeep to maintain their value, including potential repairs or updates. Setting aside around 1% of your home’s value annually for maintenance is wise, alongside an emergency fund for unexpected issues.
How Much to Save for a House
Proper budgeting is crucial for first-time homebuyers. Saving around 20% for a down payment, coupled with 3% to 6% for closing costs, prepares you for the big day. This 25% total of your home’s price is a good target to ensure a smooth transition to homeownership.
Conclusion
Understanding the full scope of the cost of buying a house helps you avoid surprises and ensures you’re financially ready for this significant life step. By planning for both upfront and ongoing expenses, you can confidently navigate your first home purchase, ensuring it’s a journey filled with excitement and financial peace. With a clear budget and a grasp of these key costs, first-time homebuyers can step into their new roles as homeowners with assurance and readiness.