Homeowner Costs That Renters Might Forget About
As you start saving for your first home, many industry professionals will say you need to put down at least 20 percent. Others will argue that the down payment size isn’t as important if you can get a reasonable rate. In fact, the average down payment for a first time homebuyer is only 7 percent. However, deciding on the right down payment for your financial goals* is only the surface of your planning. There are numerous costs new homeowners will be expected to fund both during the home buying process and after. Let’s break down the expenses.
Costs During Home Buying
Additional expenses will come with your new home other than the down payment and the mortgage. Thankfully, all upfront costs in a loan transaction are laid out and explained in the Closing Disclosure Form. (Learn more about the CD forms here.)
The traditional down payment for conventional financing is 20% of the purchase price of the house. However, some loans offer as little as 3.5% down or no down payment at all for qualifying borrowers.
Mortgage Insurance (MI)
Mortgage Insurance is an added insurance policy to protect the lender if the buyer cannot pay their mortgage, and the loan winds up in foreclosure. This insurance is required on conventional loans with a down payment of less than 20% and is also typically required on FHA and USDA** loans.
Unlike with FHA and USDA** loans, which almost always require MI for the life of the loan, on a conventional loan, the MI comes off if you are paying it monthly. MI will automatically cancel when your loan balance reaches 78% of the original value of your home. For this purpose, “original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower. You can also request to remove the mortgage insurance before then.
The appraisal is an inspection done by a professional appraiser, which confirms the current market value of the home. It will be one of the first steps in the closing process. Appraisals will usually cost a few hundred dollars but can often be rolled into the loan amount.
Closing costs, sometimes called settlement fees, are paid when closing on a home. These are fees charged by the people taking care of the purchase process. This will include the lender, real estate agent, and any other third parties involved in the transaction. Some of these costs can be rolled into the loan, allowing less cash out of pocket at closing.
Closing costs include but are not limited to:
- Government Recording Costs
- Appraisal Fees
- Credit Report Fees
- Lender Origination Fees
- Title Services
- Tax Service Fees
- Survey Fees
- Attorney Fees
- Underwriting Fees
- And more.
Earnest money is a deposit which the buyer submits at the time they make an offer to show that they have a serious intent to purchase the home. Most often, the amount is between 1-3%, and the funds are generally held in escrow with the title company or closing agent.
Earnest money is not a separate expense as it will be applied to either the buyer’s down payment or closing costs. However, it’s worth mentioning because the funds are typically paid when the offer to purchase is made rather than when the loan closes. Depending on the terms and conditions of the contract, the buyers could get money back if the sale falls through. So, it’s essential to review these terms carefully before making an earnest money deposit.
A buyer will need proof of homeowner’s insurance before the mortgage loan can be completed. Not only is it a wise thing to have, but insurance is usually required by the lender to ensure that the mortgage will be paid off, or the property will be repaired or rebuilt to its current value in the case of disaster. A buyer may also consider flood or earthquake insurance.
First-time homebuyers often forget how quickly small expenses can add up. You’ll want to make sure you consider these things in your budget if you decide to move:
- Moving Expenses: moving trucks, boxes, movers, etc.
- Maintenance Costs
- Monthly Bills
Costs as a Homeowner
Once you’ve made it past the closing table and the title in hand, you’re officially a homeowner. Hooray! Now it’s time to look at what additional costs you likely weren’t paying as a renter.
Buyers should always check the property tax rate for the new home. Local rates can vary by area depending on schools, fire districts, etc. As the buyer, you may owe the previous homeowner for some portion of fees already paid as they are paid yearly and are split when the home is sold.
Paying HOA fees can be a financial pain at times, but the amenities that come with it are often worth it. Access to a gym, spas, tennis courts, not to mention yard care, or even additional security, are just a few of the attractive features your HOA fees may cover. On average, new homeowners, especially those in a townhouse or condo, can expect to pay between $200-$400 a month on HOA fees.
In 2018, Bankrate reported that the average homeowner pays $2,000 annually on maintenance services. Over 12 months, this number may not seem that high, but are you prepared to pay that amount if a house emergency were to arise? If you live in an area with extreme flooding, heavy storms, or high rain/snowfalls, your costs may be more extreme.
And don’t forget about lawn care and maintenance! One of the beauties of apartment renting is little to no lawn care. If you plan to take care of your own yard, consider the upfront expenses you’ll need to pay. A lawnmower, edger, leaf blower, rake, etc. are all tools you probably don’t need to worry about as a renter.
It’s All About Planning
At first glance, you probably stopped reading this blog and started seeing dollar signs. (Don’t panic!) It’s all in the planning. Even if you’re not ready to buy a house today, it’s essential to start planning and saving ahead of time to avoid any financial potholes once you already have the keys to your new home in hand.
Need some help planning? We’re here when you’re ready! Connect with a local Mortgage Advisor today for a complimentary consultation.
*Connect with a Mortgage Advisor to learn more about your loan options.
**Some state and county maximum loan amount restrictions may apply.appraisal, closing costs, earnest money, First-Time Homebuyer, HOA, Homeowner, moving costs
Categories: First-Time Homebuyers