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What Is The Actual Cost Of Buying A Home
Wouldn't it be nice if homes came with price buyers could actually understand? Just because an online calculator says you can afford a home doesn’t always mean you can. Buying a house includes various costs apart from the down payment (commonly known as Closing Costs) and a person should be well informed about those beforehand, otherwise it may put you in a financial bind.
The many costs included in buying a home can be generally divided between upfront costs and future costs.
1. Upfront costs
Upfront costs, also known as closing costs, include whatever money has to be paid before the buyer actually owns the home. Here, we’ll look at different upfront costs required to buy a home.
1) Down payment: It is a part of the home price that one must pay before applying for a loan (mortgage) with a lender. It varies depending on the type of financing. A few of the loan options are mentioned below:
FHA Loans, or Federal Housing Authority, is a popular loan type because of it's low down payment percentage (as low as 3.5%.), as well as more relaxed credit restrictions. It does however require the borrower to carry Private Mortgage Insurance for a period.
Conventional Loans are another famous loan options for buyers that require anywhere from a 5-10% down payment. This type of loan requires higher credit scores of the buyer than a FHA loan.
VA Loans, or Veterans Administration Loans, which allows 100% finance of the mortgage, is best suited for people looking to buy a home with no down payment, but is only available to US Veterans.
2) Property taxes: Taxes you must pay to your municipal government for financing all the community services such as police, fire, road maintenance, public health, school, parks, etc. Property taxes vary widely, depending on the state you are in, with up to 4.2% of the home’s assessed value in some states.
3) Homeowners Insurance: Home insurance is mandatory if you take a mortgage for the home. Homeowners insurance covers rebuilding, repair and replacement costs in the event of a catastrophe such as earthquake, floods, fire, etc. The cost of homeowners insurance depends on the property, it's location, as well as the desired deductible limits. Shop around. There are many companies out there, so take your time and get the best rate.
4) Appraisal fee: The appraisal fee is the cost of an appraiser to determine the reasonable market price of your property and protects the buyer from paying more than the home is worth. The appraisal usually happens within 10-15 days after the contract is ratified. Banks almost always require an appraisal to be done when lending on a home. The cost of the appraisal will vary depending on the loan from $350 - $1500.
5) Inspection costs: These costs include inspecting structural, mechanical, pest and other potential issues in the house to make sure it is in good working condition. Home inspection costs will vary based on a multitude of factors, but range $350-$600.
6) Real estate attorney fee: Your attorney will be reviewing all the contracts and hence, a good professional attorney will make sure to get you a deal in your best interest. They will work with the lender and seller's attorney to get all necessary documents procured and filed for closing. They will also do a title search to insure there are no leans on the property. The attorney fee generally ranges from $300 - $600 and is worth the money.
7) Miscellaneous fees:
Government recording charges, the cost of state or local government to record the deed, mortgage and loan papers.
Credit report fee is the cost that the buyer has to cover for the lender, which he paid to get buyer’s credit report.
Tax service fee, though a minor fee, ensures previously paid taxes on the house are all in accordance.
Title services and lender’s title insurance is the fees related to your home’s title.
2. Future Costs
Future costs are the expenses that a new homeowner has to bear after moving into the new home. Most of the times, the buyers neglect to take these costs into account. Here are a few of the widely known future costs you must consider while buying a home.
1) Mortgage payment: The monthly loan repayment is calculated by taking into consideration the principal amount, the interest rate and the time the buyer has to pay off the loan. One principle rule, the sooner one pays down the principle; the lesser the total loan amount will be.
2) Private mortgage insurance: It is a cost passed on to the buyer as a part of monthly mortgage that protects the lender in case of default. If the down payment of the home is less than 20% of its price, the buyer has to pay PMI. It is recommended to check with the Loan Officer to see if the private mortgage insurance can be removed when the mortgage reaches 20% equity.
3) Moving costs: Moving into a new home involves expenses related to packing, storing and transporting. These costs depend on how far and how much someone is moving. If the buyer plans on moving with the help of family and friends, the costs can be negligible. However, if moving across a country, the costs can be steep. On an average, a long distance move of a 2,000-square-foot home, including packaging, may cost $5,000 to $7,000. If moving locally the cost is likely to be less than $1,000 (depending how many friends you have).
4) Utility costs: Once a buyer starts living in the home, all the utilities such as water, electricity, gas, heat and air conditioning are put to use, and paying these utility bills on a monthly basis can add up quickly, drastically affecting the bottom line. One can limit these costs to a certain extent by minimizing usage, but it is good to have a general idea of how much the utility costs would be.
5) Maintenance and renovation costs: These costs can include painting, major/minor repair work, landscaping, routine maintenance, etc. A standard rule of thumb is to keep 1% of the home’s price every year as a budget for home maintenance costs. The maintenance costs vary depending on the age, size and style of your home, previous owner’s upkeep and the climate.
6) New Stuff: If a buyer is purchasing his/hers first home or moving in to a bigger place, they might need to buy extra furniture or home appliances. The idea of filling up the new place sounds exciting however, it can drain that savings account rapidly.
Putting forth a strong effort, you can help to minimize these costs. Using providers which you or your REALTOR have a good working relationship with can often help get costs reduced a good bit, but the bottom line is there is ALWAYS going to be costs. Having a good idea of what they will be, or close to it will drastically help reduce what I like to call CD Shock.
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