If you've decided to pursue your goal of homeownership, understanding how much everything will cost becomes crucial since a house is usually the most expensive purchase you can expect to make. However, the sale price you see on a real estate listing doesn't provide a complete picture of how much it costs to become a homeowner. Rather, you'll have many other costs to think about ranging from a down payment and interest charges to many types of closing costs and taxes. Use this guide to identify and better understand all these costs so you can prepare your finances to handle them.
Home Purchase Price
When you see a purchase price quoted for a property, that cost will include the land, building and attachments plus any remaining exterior accessories such as a standalone garage or shed. It usually includes fixed appliances like air conditioners and water heaters, and listings may also specify refrigerators, microwaves and other appliances that will remain as well. The seller has the option to let the buyer have furniture and other items inside the house too, but this needs to be clarified rather than assumed. You can check the listing to see what is listed, then ask when you visit the home.
In cases where the price quoted is for a new house being built for the buyer, it might include a base plan only, so the buyer might pay extra to have additions like a basement, study or extra bathroom added. Buyers can often purchase upgrades for things like flooring and countertops as well for such properties. The home purchase price should include the building process for such homes.
In any case, the home purchase price excludes other important costs like mortgage interest, property taxes, private mortgage insurance (PMI), homeowners insurance and any homeowners association (HOA) fees. So, the total cost by the time the house gets paid off runs much higher than the sticker price. However, you can negotiate the purchase price with the seller and get a better deal depending on the home's condition and the current market.
Read More: 5 Requirements to Buy a House
Monthly Mortgage Payment
Unless you're doing a cash transaction, you'll likely take advantage of some type of mortgage program to buy the home, and this comes with several costs to be aware of when borrowing money. Some of these directly relate to financing the home purchase and only need to be paid for the standard 15 to 30 years that you'll have the mortgage. However, other costs will persist for as long as you own the property.
The mortgage payment components include the following:
- Loan principal: This part of your monthly mortgage payment includes the part of the original loan amount that you're paying off. You'll pay mortgage interest on the remaining balance of the mortgage loan, so making extra payments toward the mortgage principal can help you reduce your costs and pay off the loan early if you want.
- Mortgage interest: Your mortgage interest rate gets charged on the amount of money you've borrowed for the house and applies to your remaining principal. This rate gets determined by factors such as the type of loan and term, your lender, market conditions, your credit score and even your down payment amount. Early in the mortgage repayment process, you'll probably find that a lot of your monthly payment goes toward this rather than the principal.
- Mortgage insurance: Unless you take out a Veterans Affairs (VA) loan, you'll probably have to pay for some form of mortgage insurance policy whenever your down payment is less than 20 percent of the home sale price. This serves as a protection for your lender due to the higher risk with low down payment mortgages. PMI will usually be a small percentage of the loan amount, and you can often get rid of it after you've reached the 20 percent equity point during repayment.
- Escrow: This part of your mortgage accounts for your property taxes and homeowner's insurance premiums while you're in repayment so that the lender can handle distributing the funds to the right third parties. Once you pay off the mortgage, you'll still need to pay for these two items on your own for as long as you own the property. Property taxes get calculated based on an assessed value and tax rate in your locale (with some credits available), while homeowner's insurance will offer protection for your property and possessions in case of a fire, tornado or another disaster.
Read More: What Is PMI?
Many costs associated with buying a house fall in the category of closing costs, and they often total between 2 and 5 percent of your home's price.
Earnest Money and Down Payment
When you find a home and enter the offer process, the need to have some substantial cash set aside can arise in the form of an earnest money deposit and a down payment you pay upfront. However, the amounts you'll need will depend on the type of loan, your financial situation, your preferences and the property's value.
You can expect to provide the seller with some earnest money when you hand over your offer for the property. This can be a small amount such as $500 or $1,000, and it mainly shows the seller you have a real interest in buying their home. A higher amount might help in situations with competing offers, and you can expect to get this money returned if you don't have your offer accepted.
The more substantial part is your down payment which will often be 3 to 20 percent of your house's price, although some government-backed mortgage programs waive the down payment requirement and assistance programs exist for qualified first-time buyers. Depending on the mortgage payment, you may need to have this money set aside in your bank account, or you might be allowed to use a gift from a family member. In any case, you'll want to pay enough down so that you can minimize interest and PMI but still have a decent emergency fund available for other home costs.
Read More: What Is Earnest Money?
Homeowners Association Fees
Along with your monthly mortgage payment, you may end up with a monthly or annual HOA fee if you buy a property that's part of a condominium complex or live in a neighborhood that requires it for homes. You'll usually have an upfront payment when you buy the home along with recurring payments thereafter. Depending on the HOA, this fee can pay for things like water, grounds keeping, pool maintenance, community gyms and trash collection.
In some cases, the HOA fee can reach $1,000 a month or more if you live in a luxury community with access to many perks and included services. You'll usually pay this directly to the HOA unless your lender agrees to put it with your property taxes and homeowners insurance in the escrow account.
Real Estate Closing Costs
Many costs associated with buying a house fall in the category of closing costs, and they often total between 2 and 5 percent of your home's price. The various costs usually related to real estate or lender transactions, and you can shop around to save on many of these costs. You'll usually get a closing cost quote when you're in the mortgage application process, but the total can change by the time closing happens.
Keep in mind that lenders will sometimes let you roll the costs into your mortgage so you don't have to pay the sum upfront, or they'll just charge a higher interest rate instead of some of the closing costs. However, these options increase your borrowing cost in the end.
While you might come across some other fees that vary by lender and property, take a look at some of the most common types of closing costs you'll come across.
Read More: How to Buy a House
Lender and Loan Fees
Several closing costs relate to your lender handling and processing your mortgage application paperwork as well as collecting money for various fees associated with your loan. For example, you can expect to pay a small application fee as well as charges for having your credit report pulled and having attorneys help during the process. You can also expect a loan origination fee – usually up to 1 percent of the loan amount – to cover the underwriting process. If you opted to purchase discount points to save on interest, you'll need to pay the point cost as well.
You can also expect the lender to want prepaid interest from you to account for the gap between the settlement date and first payment as well as any commission owed for getting help from a mortgage broker. Upfront mortgage interest plus a related application fee will apply unless you've made the 20 percent down payment, and the amount will depend on the type of loan you've taken out. Lenders may have other various fees too, so check the terms of the mortgage to avoid surprises.
Home Inspection and Appraisal
Between the home offer and closing, you'll have to go through steps to have the house inspected for potential issues as well as get an appraisal so that the mortgage lender will know that they're not lending you more money than the property's value. Both of these items usually cost up to $500 each, where the home inspection fee varies more widely since the property's type and size will play a role. You might also pay for other inspections for termites and radon, but you can usually shop around for most of these inspections.
Title and Transfer Fees
Some other closing costs will relate to the process of searching for the house's title to make sure no issues are outstanding as well as transferring the ownership once the purchase gets made. The title search fee can cost a few hundred dollars and pays for the process of checking real estate records to ensure a legal and clean transfer, while title insurance can cost a very small part of the home's purchase price and offers protection in case title issues come up later. You can also expect property transfer and deed recording fees paid to your locality.
Professional Services Fees
As a home buyer, you usually don't have to pay a commission to the real estate agent. Instead, the seller will pay up to 6 percent of the home's price and split that to both a buyer's agent you use and their seller's agent. However, if you're selling a house along with buying a new one, you'll incur that expense and usually pay it out of the proceeds of your home sale. In rare cases, you might pay a fee to a real estate agent as a buyer if you worked out some arrangement to do so.
Other professional services you might pay for include seeking the help of a real estate attorney or escrow agent. Attorneys will set hourly or per-project rates, while the escrow charges usually go by a percentage of the house's price.
Prepaid Property Tax and Insurance
Just as your lender will want prepaid PMI and interest, the same applies to your property tax and homeowners insurance premiums. Bank of America advises that you'll probably need to pay 12 months of your homeowners insurance premiums and six months of your property taxes upfront. There's also the chance of a property revaluation once you move in, and this can mean you need to pay some more property taxes to make up for the difference.
Read More: What Is a Reduction Factor for Property Taxes?
Ongoing Home Costs to Consider
Along with these costs associated with buying a home, you should keep in mind the ongoing costs you'll experience during homeownership when deciding whether to proceed. This includes considering the expenses for maintaining the property – whether that includes maintaining the lawn, replacing appliances or making major repairs – as well as handling the likely higher utility expenses for a home versus an apartment. You'll also want to account for increases in ongoing costs such as property taxes and homeowners insurance.
- Consumer Financial Protection Bureau: What Are All the Costs of Buying a Home?
- Federal Trade Commission: Shopping for a Mortgage
- Bank of America: What Are Closing Costs?
- Consumer Financial Protection Bureau: How To Decide How Much to Spend on Your Down Payment
- Brookfield Residential: What's Included in the Purchase Price When Buying a New Home?
- Consumer Financial Protection Bureau: On a Mortgage, What’s the Difference Between My Principal and Interest Payment and My Total Monthly Payment?
- Consumer Financial Protection Bureau: What Is Private Mortgage Insurance?
- Lucas County Auditor: How Property Taxes Are Calculated
- Consumer Financial Protection Bureau: Understand Loan Options
- Consumer Financial Protection Bureau: Are Condo/Co-Op Fees or Homeowners’ Association Dues Included in My Monthly Mortgage Payment?
- Consumer Financial Protection Bureau: Is There Such a Thing as a No-Cost or No-Closing Loan or Refinancing?
- Consumer Financial Protection Bureau: Can My Final Mortgage Costs Increase From What Was on My Loan Estimate?
- NerdWallet: Mortgage Closing Costs: How Much You’ll Pay
- Consumer Financial Protection Bureau: What Are Mortgage Origination Services? What Is an Origination Fee?
- Ohio Department of Commerce: Home Buyer's Guide
- Consumer Financial Protection Bureau: What Are Title Service Fees?
- The Motley Fool: 10 Expenses of Home Ownership You Need to Know
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.