Buying a Home: The Costs You Don't Think About
When you’re preparing to buy a house, you might think about the purchase price, but that only tells part of the story. The costs of buying a house go well beyond what your mortgage payment would be. To truly figure out your budget and how much home you can afford, don’t forget to factor in other fees and expenses.
The down payment is what you’re going to need in cash, upfront to buy a house. It’s usually 10% or 20% of the purchase price. If you choose an FHA loan or a conventional loan, a down payment is required. For a conventional loan, your down payment depends on the lender. Some loans might require as little as 3% down. VA loans and USDA loans have stringent requirements but don’t require down payments.
Origination and Application Fees
When you work with a bank to get a loan, then you have to pay an origination fee. An origination fee is payment for the services required to create a loan. An underwriting fee might also be owed, and an application fee. The lender can also charge a fee for your credit report.
Origination fees can be anywhere from 0.5% to 1% of the loan amount. Origination fees may be negotiable, but not always. You might also hear origination fees called points or discount fees.
Origination and application fees are sometimes grouped together as closing costs. In total, closing costs will usually add up to anywhere from 2% to 5% of the purchase price of a home.
Title fees actually are part of the closing costs, but since some new buyers aren’t aware of them, they’re worth talking about on their own. Title fees represent the cost to transfer a home’s title from the seller to the buyer.
You might, for example, have to pay a title search fee. This covers the cost of searching for property records to make sure no one else can make a claim to the property you want to buy.
There are two types of insurance that are especially relevant when you’re going to buy a home. There’s homeowners insurance, and then there’s private mortgage insurance (PMI).
Homeowners insurance is what’s going to protect you if your home is damaged. If you were the victim of a theft or a natural disaster, for example, homeowners insurance might cover your losses.
PMI is required by most lenders if you make less than a 20% down payment. PMI is a way for a lender to protect itself. Your PMI premium could on average be anywhere from .58% to 1.86% of the amount of your loan. Once you start building equity in your home by paying down your mortgage, you can eliminate your PMI.
You may be responsible for taxes at closing. Usually you can expect to pay two months of property taxes when you close. Since most homeowners pay property taxes in advance, you might have to reimburse the seller for these. There’s also the potential you’ll have to pay a transfer tax. This is a tax for changing the title to the property. The amount you’ll pay in transfer taxes depends on where you live, and sometimes this is shared by both the buyer and seller.
Appraisal and Inspection Fees
If you’re going to get a loan to buy a home, you’re going to need an appraisal. An appraisal gives an estimated value of the home you’re going to buy. Lenders require it so that they know that you’re not overpaying for a home. Appraisal fees range from around $300 up to $1,000.
A home inspection fee is separate. A lender might want an inspection or you could want one for your own peace of mind. Inspection fees range from $300 to $500 most of the time. If you’re buying an older home you could also opt for a mold or pest inspection, each of which can be upwards of $200.
Real Estate Commissions
If you use a real estate agent, they’re going to get paid by commission, which is a percentage of the sales price. Sellers may pay these fees, but not always. You may have to pay them out of pocket, so be clear on the terms of your agreement.
You may not have to pay all of the above fees, or you may have to pay even more. It varies depending on your state and individual situation, but you do need to be clear on any and all fees before you enter into an agreement to buy a home. Go over your loan disclosure carefully as well, and if you aren’t sure about anything, consider consulting with a closing attorney.