Costs of Buying & Owning Your Home
When purchasing a home, there are several upfront costs. Some of these are paid out-of-pocket once the seller accepts your purchase offer, while the rest are paid at closing.
Earnest money: It is traditional to accompany an “earnest money” check with your purchase offer to let the seller know that you are serious about purchasing the property. The amount of an earnest money check usually ranges from 1% to 3% of the home’s purchase price. Once the offer is accepted, the seller deposits the earnest money check into an escrow account, and the funds are credited against your closing costs.
Down payment: A down payment is a percentage of the purchase price you pay upfront, usually at closing. In your purchase offer, you will need to specify a certain down payment amount, although you can change this amount before closing if the seller agrees. The amount of your down payment will vary depending on several factors including your credit history, local market conditions, and the type of mortgage loan you are approved for. However, this amount typically ranges from 3.5% to more than 20% of the purchase price.
Home appraisal: Lenders require a home appraisal before approving the loan to ensure that the offer price is equal to the value of the home. Appraisal costs are paid during or before the appraisal and usually cost $300 to $500.
Home inspection: It is highly encouraged for a buyer to hire a licensed home inspector to look for potential problems and defects. It usually costs around the same as an appraisal and is generally paid at the time of the inspection.
Property taxes: Property owners pay property taxes upfront, generally in six-month increments. You need to compensate the seller for taxes they paid on the period between the closing date and the end of the current tax period. Depending on your local tax rate and the closing date, this number varies widely.
First year’s homeowner’s insurance: Before closing, lenders require proof of homeowner’s insurance. It is almost always required to pay the first year’s premium upfront, either on the date you buy the policy or at closing. The cost of homeowner’s insurance not only varies based on the value, style, location, and contents of the home, but varies depending on your credit score, policy deductible, and coverage limits as well.
Other closing costs: Some of the other closing costs include loan origination charges, credit report fee, flood certification fee, lender’s and owner’s title insurance, recording taxes, state and local transfer taxes, first month’s mortgage interest, and closing fee.
Loan payments: You are required to make monthly principal and interest payments during the life of your mortgage loan, which are typically either 15 or 30 years. Your payment remains the same each month for the full loan term if you have a fixed-rate mortgage. With adjustable-rate mortgages, your rate gets tied to a benchmark and your payment will vary as the benchmark changes.
Property taxes: To help pay for local schools, infrastructure, and other important services, your city or county sets property taxes. These rates will vary widely depending on location and tend to change from year to year. Your property taxes are part of your monthly escrow payments – each month you pay one-twelfth of your annual tax burden.
Homeowner’s insurance: The amount of your homeowner’s insurance premium can vary year to year based on your home’s appraised value, the policy’s deductible and coverage amounts, claim history, and your credit score. According to the National Association of Insurance Commissioners, the average annual homeowner’s insurance premium is $1,192.
Private mortgage insurance: Your monthly escrow payment will initially include a private mortgage insurance (PMI) premium payment if you used a private mortgage lender and your down payment was less than 20% of the purchase price of your home. If your home is foreclosed upon and is sold at a discount relative to your purchase price, private mortgage insurance protects your lender from financial loss. Monthly private mortgage insurance payments usually range from $50 to $200, depending on the balance of your loan and PMI rate.
Utilities: When you own your home, you are responsible for paying all utilities like water, gas, electric, garbage and recycling, cable and internet, etc. Depending on location and usage, these costs can vary widely.