Buying a house is a big decision. For some, it’s the biggest investment of their lives. And with all the confusing information out there about costs and fees, how do you know what to believe?
The cost of buying a house can be very complicated when looking at all aspects, such as real estate agents commissions, mortgage interest rates, property taxes on your home (which vary depending on where you live), closing costs for the purchase and sale transaction set by the lender or broker that will finance your home purchase and any other expenses associated with moving out or in during this process. What are the hidden costs of buying a house? We answer these questions and more below.
What is the True Cost of Buying a House?
The cost to buy a house will vary by location, but there are some common costs that you will encounter when purchasing a home. Many of these costs will change based on the real estate market, your location, and the type of home you purchase.
Down Payment
These monies will be paid upfront at the time of closing. And the remainder of the balance will be your mortgage on your house.
A good rule of thumb the more you put down, the lower your monthly mortgage payment will be, and you could qualify for a lower interest rate.
| House Sales Price | Down Payment (3% to 20%) |
| $150,000 | $4,500 – $30,000 |
| $250,000 | $19,500 – $130,000 |
| $350,000 | $10,500 – $70,000 |
Closing Costs
Closing costs are fees required to close on a home, and they’re usually split between the buyer and seller. As for closing costs as a buyer, you’ll need to cover between 2% – 5% of your house purchase price.
The exact amount that you will pay in closing costs will be unique to your house purchase. For example, as the buyer, you’ll typically be expected to cover things like any inspections fees, appraisal fees, and title searches.
Closing costs are important to know and understand. You should ask your lender for a few different scenarios when you receive that pre-approval letter!
Reserves
For many first-time homebuyers, the concept of reserves is unfamiliar territory. Though they’re not always a cost in and of themselves when buying a house, you will need to have this money saved up after your down payment, and closing costs are paid – so prospective buyers need to be aware.
As a home buyer, you should have an emergency fund of around 6 months’ worth of mortgage payments. Mortgage companies want to ensure that they are protected if your income changes and you do not default on your mortgage.
Typically, when you’re buying a house, your lender wants to see that you still have at least two months of reserves. Depending on your loan program, though, your lender might require that you have more than 2 months worth left in your bank account.
The True Costs of Owning a House
Once you have saved enough for your down payment and closing costs of buying a house, there are costs you have to pay going forward as being a homeowner.
These costs should already be factored into your monthly budget to be truly prepared for buying a house. And as we stated before, ensuring you have an emergency fund in place can cover at least 6 months of living expenses. Additionally, if you want to do home improvement projects, you should include those one-time expenses into your emergency fund.
Reserves
For many first-time homebuyers, the concept of reserves is unfamiliar territory. Though they’re not always a cost in and of themselves when buying a house, you will need to have this money saved up after your down payment and closing costs are paid – so it’s important for prospective buyers to be aware.
As a home buyer, you should have an emergency fund of around six months’ worth of mortgage payments. Mortgage companies want to make sure that they are protected in the event your income changes and you do not default on your mortgage.
Typically, when you’re buying a house, your lender wants to see that you still have at least two months of reserves. Depending on your loan program though, your lender might require that you have more than two months’ worth left in your bank account.
The True Costs of Owning a House
Once you have saved enough for your down payment and closing costs of buying a house. There are costs you have to pay going forward as being a homeowner.
To be truly prepared in buying a house these costs should already be factored into your monthly budget. And as we stated before ensuring you have an emergency fund in place that can cover at least 6 months of living expenses. Additionally, if you are wanting to do home improvement projects you should include those one-time expenses into your emergency fund.
Mortgage Payments
Your monthly mortgage payment will be your biggest expense. This payment should not be a surprise to you at this point. Your lender would have given you a closing cost estimate that would include your mortgage payment.
From Bank Rate, the average monthly mortgage payment in the US is $1,275 for a 30 year fixed mortgage. And per the U.S. Census Bureau’s American Housing Survey, the median monthly mortgage payment is $1,609.
Property Taxes
Property taxes are based upon your city/county and the state you live in. Property taxes are typically based upon the assessed value of your house. And, yes, there is a difference between what your house was appraised for and the appraised value.
Your lender will collect your first payment towards your property taxes at closing. Depending on your lender, most will impound your property taxes as part of your monthly mortgage payment. Confirm with your lender to ensure you do not miss any payments.
Your first payment towards your property taxes will be collected at closing. Depending on your lender, most will impound your property taxes as part of your monthly mortgage payment. Confirm, with your lender to ensure you do not miss any payments.
Mortgage Insurance
If your down payment were less than 20%, more than likely, your lender would add mortgage insurance to your mortgage payment. Mortgage insurance is basically a way for your lender to hedge their risk against you defaulting. Mortgage insurance is meant to protect the lender and not you as the borrower.
Mortgage insurance is charged monthly, as it varies between 0.5% and 1% of your loan amount.
Here are the two types of insurance:
-Borrower-Paid (BPMI)
-Lender-Paid (LPMI)
BPMI is a fee charged on your monthly mortgage statement. Once you have 20% equity in your house, mortgage insurance will remove from your mortgage payment.
LPMI bolis down to one thing. For you to avoid paying mortgage insurance, your lender will provide you a slightly higher interest rate than you would with a loan that did not have LPMI.
Key point: If you decide to go this route, know this higher interest rate will be for the life of your loan. Once the equity in your house meets 20%, you can refinance your loan with a lower interest rate.
Homeowners Insurance
Homeowner’s insurance can help you cover costs that occur if there is any major damage to your home. Sometimes mortgage companies will also require a separate policy for specific types of damages like floods or earthquakes.
HOA Fees
When you purchase a house in a planned housing community, there may be an additional fee on top of your monthly mortgage payments. These fees contribute to the upkeep and improvement of common spaces or amenities of the development and could include utilities like gas/electricity.
Utilities
Don’t forget to account for the cost of monthly utilities when you plan your budget. You can expect to pay for electricity, water, trash collection, and gas (or another type of fuel).
Maintenence
The last expense you should account for is home maintenance. It varies based on the individual condition of your house, but on average, you should set aside 1% of your total house value per year to ensure they have enough to cover these types of repairs.
