Buying a new home sounds like an exciting idea, but can also be a little scary when you think about the large financial commitment you are making. Understanding the costs involved will help you to assess whether this is a dream that you can afford. Here is a summary of the major upfront and recurring costs associated with buying a home.
Upfront Costs
Upfront costs are those you will be required to pay before the sale is complete. These include:
Down Payment
This is a percentage of the purchase price that you pay upfront. Your down payment amount will depend on the type of mortgage you get and be as low as 3.5 percent or as high as 20 percent.
Closing Costs
These are the costs involved in obtaining a mortgage, which usually amount to 2 to 5 percent of your home’s purchase price. Closing costs include:
- Lender fees
- Appraisal fee
- Title fees
- Prepaid property taxes
Inspection Fee
An inspection is not usually required for a new construction home but is needed for a resale home to confirm that the house is free of any major issues. The cost of an inspection varies depending on the size and location of the home.
Lender Cash Requirements
As a way to ensure that a buyer will be able to make their mortgage payments, many lenders require that they have a certain amount of cash reserves available after all other upfront expenses have been paid. The amount required depends on the lender’s policies and your income-to-debt ratio.
Recurring Costs
Mortgage Payments
Your mortgage payment will be calculated based on your interest rate and the type of mortgage you get. Payments may include interest-only or principal and interest. It’s important to keep in mind that your payment amount can change if you have a variable-rate mortgage in which your interest rate will be determined by the market.
Property Taxes
Property taxes vary greatly between counties and cities and are usually calculated annually and paid as a percentage of your home’s estimated value.
Homeowner’s Insurance
Homeowner’s insurance insures your house and belongings in case of a major event, such as flooding or fire. The cost of homeowner’s insurance varies depending on the location and the size of your home and can be paid annually or monthly.
Mortgage Insurance
Mortgage insurance is required if you made a down payment of less than 20 percent. These payments are usually added to your monthly mortgage payments.
Homeowners’ Association Fees
Homeowners’ association (HOA) fees are common in newer communities to pay for the cost of maintaining and regulating the neighborhood. HOA fees vary based on location and are usually paid monthly or quarterly.
As you can see, there are a number of costs to consider when deciding if you’re financially ready to buy a home.
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