Costs to Consider When Buying a Home

For many people, buying a new home is a time of many different emotions. Exhilaration, pride and anxiety are just some of the feelings that soon-to-be homeowners like you may have as you take on this major life changing event.

For first-time buyers, there is often one other emotion they may feel if their real estate agent has not prepared them ahead of time – sticker shock. Besides a mortgage, down payment and commissions, there are many other costs that are required, as well as unexpected costs that may arise. Here are the most common expenses and costs to consider when buying a home.

Before the sale process starts, take into consideration the following two biggest financial steps:

1. Deposit Earnest Money. This good faith deposit is done when the purchase and sale is finalized. It shows that you, the buyer, is serious about purchasing the home. This is usually 1-3% of the sale price.
2. Apply for a Mortgage. Although some people can finance a home purchase with cash, most buyers need to apply for a mortgage. To do so, they need to also fund a down payment. The standard is normally 20% although if mortgage lenders approve, it can be less than that amount.

Important Closing Costs to Understand

In addition to the down payment, there are various closing costs a client must pay to secure a loan. The total of these costs is normally 3-6% of the overall loan amount. Prices for each type of service can vary depending on the type of property, where the property is located and more. Some of these additional costs home buyers need to consider are:

• Loan Origination Fee. The mortgage lender charges this fee to cover the cost of processing, underwriting, and executing the loan. This is typically 1% of the overall mortgage.
• Private Mortgage Insurance (PMI). This additional insurance is required if the mortgage down payment is less than 20%. It is added as a premium to your monthly mortgage payment.
• Mortgage Points. This is prepaid interest that home buyers pay at the time of closing allowing them to get a lower interest rate as well as lower monthly payments. A mortgage point is equal to one percent of the total loan amount.
• Escrow Account. There are two parts to escrow.
  • First, an escrow account is set up by the mortgage lender with a neutral third party who then holds the earnest money and down payment until the final sale.
  • Then, once the sale is finalized, the mortgage lender will establish an escrow account from which property taxes and insurance premiums are paid, in addition to your monthly mortgage payment. Most lenders require clients to deposit an amount equal to six months expenses in the escrow account.
• Taxes. Most buyers are aware that they need to pay property taxes but may not know of one other unexpected expense — school taxes, which goes towards the cost of the expenses for a community’s public schools. Not all states have a separate school tax; in some cases, it is levied from the property tax.
• Homeowner’s Insurance. In addition to standard home insurance, you may also need to purchase additional coverage, such as flood insurance or specific insurance for your location.
• Home Appraisal. A home appraisal is required by mortgage lenders to assess the value of a home.
• Title Search and Title Insurance. A title search is required to ensure there are no claims or liens on a property. A professional examiner will review all public records including mortgage deeds, tax liens, land records and other sources to verify there are no outstanding liens that would impede a sale.

Other Possible Expenses You May Encounter

In addition to the above, there may be other unexpected costs that you should prepare for as a potential homebuyer ahead of time, including:

• Document Preparation Fees. Your mortgage lender and/or real estate attorney may charge an extra fee to prepare the many forms required for a closing.
• HOA Fees. One unexpected expense that many people are caught unaware of is a Homeowner Association (HOA) fee. These fees, assessed by a neighborhood’s board of directors or council, pay for maintenance and upkeep throughout the neighborhood. These fees may range from as low as several hundred dollars a year to several thousand per month, depending on where you live.
• Home Inspections. These important inspections by a trusted 3rd party can help uncover potential problems and assess any risks associated with your pending purchase. In some cases, the seller will agree to make necessary repairs. But if an agreement cannot be reached and the buyer has their heart set on the home, they will have to absorb those costs. Mortgage companies may also require a pest, asbestos and/or radon inspection. Most residences built before 1978 require a lead inspection disclosure.
• Home Warranty. This is a service contract that limits out-of-pocket expenses for repairs or replacements in the home. It generally lasts for one year.
• Legal Representation. A home is the biggest financial investment most people will ever make. To protect that investment, it may make sense to work with an attorney who specializes in real estate. This professional will ensure that all the necessary legal issues are covered. After all the paperwork has been finalized at the closing, the attorney or escrow agent will file the deed with the appropriate government entity in the county, such as the Registry of Deeds, that proves that the client is now the legal owner. Recording a deed is typically a nominal cost – less than $150.
• Monies in Reserve. It’s wise for home buyers to have at least two months of funds in reserve for mortgage payments and three to six months in reserve for emergencies or unexpected expenses.
• Moving Costs. Unless a homebuyer is going to move themselves, they will need to hire a company to do that for them. And if they are not moving directly into the home, they may have to pay for temporary living arrangements, dining expenses and storage for their belongings.
• Survey Fee. This may be required if the property’s boundaries are unclear. This could potentially cost up to $1,000 depending on the property itself.
• Wire Transfer Fee. This cost may be incurred if you are wiring funds to purchase the home instead of using a certified check.

Additional Costs to Consider After the Sale

Once you are in your new home, there will be other, additional expenses you’ll want to factor into your financial plan, including:

• Infrastructure Costs. Considering critical things like water, sewer, electricity, internet, and other costs into their monthly budget is essential.
  • If you don’t have a private well, you will need a hookup to public water. Private sewer systems or cesspools need to be pumped once a year. If the system fails, it may cost tens of thousands of dollars to repair. (That’s why many states require private sewer systems to pass an inspection before the sale can go through.)
• Heating & Cooling. It’s important to also think about home heating and cooling expenses, especially as oil and natural gas prices can greatly vary year to year.
• Trash & Recycling Services. In many communities, a fee is assessed for trash to be picked up by a company that the municipality contracts with for that service. There sometimes may be extra fees for recycling pickup. In other circumstances, you may need to contract waste management services directly with a private company.
• Miscellaneous Services and Expenses. Depending on where you will be living, you may have extra expenses such as landscaping, pest control, snow removal, and more.

The costs of buying and owning a home can add up quickly, so it’s important to prepare. That’s where the experts at TR Realty come in!

You’ll want to save money, improve or maintain your credit score and compare lenders to get the best mortgage rates possible, but before you get started, finding a local real estate agent like ours to guide you through the home-buying process is essential. Professional expertise can make all the difference.