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Buying a home requires just a down payment, right? Wrong. Keep reading to learn about what else you’ll be on the hook for when you buy a house.
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Roughly two-thirds of Americans own a home, and it’s a not-insignificant part of the mythical American Dream. Unfortunately, buying a home isn’t cheap. Based on how mortgage rates have been looking lately (as of this writing, the average rate for a 30-year fixed-rate mortgage loan is 6.96%, per Freddie Mac), I’m expecting my housing costs to double in the process of going from renter to homeowner.
While I’m already anticipating those higher monthly costs when I buy (ideally next year), I’m also looking at the big picture, and the cash I’m saving now will have to cover a few different expenses on the way to actually getting to call myself a homeowner.
1. Earnest money deposit
The market has been favoring sellers for the last few years — this means there are more buyers than sellers, and as such, sellers are fielding more (and higher) offers. So to sweeten a potential deal, it’s a good idea to make an earnest money deposit to show a seller you’re serious and less likely to back out of the purchase, because you’ll lose the money if you do.
One nice thing about an earnest money deposit is that if the sale goes through, that sum is just rolled into your down payment. So even if I have to cough up some money when I find a place to buy, it just means that I’ll have less to pay for a down payment later (more on down payments below).
2. A home inspection
You might expect the cost of a home inspection to be rolled into closing costs (more on those below), but I’m hoping to choose a well-regarded home inspector myself and as such, I can expect to pay them directly when they check out my future home. A home inspection is not required when you buy with a conventional loan, and that’s my plan. If I were getting an FHA mortgage loan, however, an inspection would be required to ensure the home’s livability. But even though I don’t strictly have to get the house inspected to be able to buy it, I absolutely will be.
A home inspection is for the buyer’s protection — you want to know the actual condition of the house you’re buying. Even if an inspection turns up a problem, it doesn’t mean you have to terminate a purchase contract. Rather, you can renegotiate the price with the seller, or ask them to fix the problem. Knowledge is power in all things, and especially in the home-buying process.
3. Down payment
My down payment will be the largest chunk of money I’ll have to cover in the course of buying. While I may be able to buy with as little as 3% down on a conventional mortgage loan, I’m intending to make a down payment of at least 10% of my home’s purchase price.
If I put down 20% or more, I could avoid paying for PMI (private mortgage insurance) and save money on my monthly housing costs. PMI protects a mortgage lender, rather than a homeowner. It’s an insurance policy that ensures the lender will be out less money if the homeowner stops making payments on the loan. It’s charged monthly and is part of a mortgage payment. The good news is that it can be canceled once you reach 20% equity in your home.
4. Closing costs
In addition to signing a stack of paperwork when I actually get to the closing table, I’ll also need to be ready to pay closing costs. Closing costs generally amount to 2%-5% of a home’s purchase price, and can include the following:
Mortgage loan application and origination feesUnderwriting feesCredit report costsA home appraisalProperty taxesTitle insurance
This isn’t an exhaustive list, and different states have different requirements (and fees) for closing on a home loan.
5. Moving expenses
Even after the paperwork is signed and I have the keys to my new home (and a big gaping hole in my savings account from paying the above costs), I’ll still need to cough up more money to move. My next move will be a local one, as I’m hoping to buy a home in the same city I live in now (and I love my current neighborhood, so I’m not opposed to making it a very local move). Just the same, I’ll need to refresh my supply of moving boxes, tape, and bubble wrap, and hire a moving company to safely transport my belongings from my apartment to a house.
As you can see, my costs don’t begin and end with a down payment — there’s a lot more to worry about along the way to becoming a homeowner. If you’re thinking of buying a home, it’s worth exploring how much you can expect to pay for these upfront costs, even if you know you can afford the mortgage payments.
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