As a first-time homebuyer, it’s not uncommon to approach the cost of buying a new home thinking “the calculators show my mortgage payment will only be X dollars, which is about the same as my rent, so maybe I can afford a house that costs X dollars.” Buying your first home is very exciting, and although it can be scary and costly, your goal of homeownership can be possible with a bit of planning and knowledge. Knowing your monthly income and personal expenses is a great start! But like the infomercials say… “oh, but there’s more!”
What first-time homebuyers often overlook is the fact that buying a home costs more than the price of the home, and you’ll need money available up front to get through the home buying process. To get a true picture of the amount of money needed to buy a house (and then own your house), consider the costs outlined below.
UP FRONT: Money Needed to BUY A House
During the process of 1) making an offer on a new house, 2) having your offer accepted, and 3) taking ownership of that new house, you’ll need money available to cover expenses that include earnest money, a down payment, a home inspection, and closing costs.
To determine the approximate amount of money needed, let’s assume you’re purchasing a home valued at $150,000.
Earnest Money [also called a Good Faith Deposit]
Earnest money is essentially a deposit you put down on a potential purchase when you submit an offer. It shows the seller that you are a serious buyer. If the offer is accepted, the earnest money can be deducted from your down payment. Depending on the market, a typical earnest money amount is 1%-3% of the price of the home.
$150,000 x 1% = $1,500
Typically, 20% of the value of the home is a good target. However, a smaller down payment is possible, allowing borrowers to buy a home sooner if they haven’t had enough time to save up as much. However, most lenders will require borrowers to carry Private Mortgage Insurance (PMI) when their deposit is less than 20%. PMI is a risk-management product that protects lenders against loss if a borrower defaults on mortgage payments. Borrowers pay their PMI monthly in addition to their mortgage payment.
10% down payment = $15,000 -minus earnest deposit of $1,500 = $13,500
To avoid unexpected repairs and expenses after moving into your new home, potential homebuyers should mandate that any offer they make on a new home is contingent on a home inspection. Hire a home inspector to check the entire house (foundation, roof, electrical, plumbing, etc.) and make note of any potential issues. You can always ask the sellers to fix these issues, or lower their asking price, before the sale is complete.
Average home inspection cost = $315
An appraisal is an estimate of a home’s property value. An appraisal is required by your mortgage lender because they will only approve a loan when a property appraises for the full sale price or more than the sale price. You cannot get a $200,000 loan for a property that only appraises at $150,000. Although the lender chooses the appraisal company, the buyer pays the fee.
Average property appraisal cost = $400
Closing costs include all of the various fees you pay to your lender and other parties involved with the closing of your new home. They include an interest payment, insurance costs, various lender fees, title and attorney fees, an escrow account payment, and possibly realtor commissions. All-in-all, this could come out to 2-5% of the purchase price. There is the potential for a buyer to negotiate that closing costs, or a portion of them, be paid by the seller.
5% = $7,500
Total UPFRONT costs: $23,215
MONTHLY: Money Needed to OWN a House
So once you’ve settled on your new home, there will obviously be monthly payments and expenses.
Principle and Interest (P & I)
Your mortgage loan is broken down into principle and interest amounts. Together they make up your total mortgage payment.
Purchase price – minus down payment = $135,000
Mortgaged for 30 years at 4.125% = approx. $654.28 per month
Private Mortgage Insurance (PMI)
As mentioned earlier, if your down payment was less than 20%, you’ll have to pay for Private Mortgage Insurance. This equates to approximately 1% of your outstanding loan amount and is adjusted on an annual basis.
1st year PMI = $1350 /divided by 12 months = $112.50 per month
Escrow for Property Taxes
These typically include both real estate and school taxes and vary greatly from area to area. The amount of your taxes is based on an assessment of your property, which is different from your appraisal value. Your taxes will be divided into 12 equal payments and will be included in the payment to your lender each month. Your lender will set up an escrow account to hold your tax payments and will pay your taxes on your behalf from this escrow account.
Potential property tax amount sample = $4,500 per year or $375 per month
If you finance your home with a mortgage, your lender will require that you carry homeowners insurance. Homeowners insurance will cover you and protect your home in the event of a fire, natural disaster or other insured event. Homeowners insurance will also be paid on your behalf from your escrow account.
The average cost of homeowner’s insurance = $952 per year or $79.33 per month
Approximate total MONTHLY cost: $1,221.11 per month
In addition, some residential areas require homeowners to pay Home Owners Association (HOA) fees on a monthly basis. Homes bought within a defined area (typically part of a housing developments) are automatically part of the Association. The fees that each homeowner pays go towards the costs of maintaining common areas, lawn service, snow removal, clubhouse/pool privileges, and more. HOA fees vary greatly from area to area and are required if purchasing within the defined development.
Typical HOA fees can range from $100-$500 per month.