When you decide to purchase a home, there is more to consider than just the purchase price or your monthly mortgage payments. Here are some one-time fees you can expect to pay as you close on your home. Buyers, not sellers, are typically on the hook for these payments. Here is a glimpse at what these may include:
Down payment: A down payment is the amount you contribute toward a home’s purchase price. Depending on the lender or loan type, you may need to make a down payment equal to 0-20% of a home’s sale price.
Appraiser fees: An appraiser charges a fee to determine the value of a home based on several factors: sales of similar properties in the area, market trends and house amenities (including square footage), defects and structural damage. Lenders won’t approve a loan for more than a house’s appraised worth. Average cost: $300 to $500.
Home inspection fee: A home inspector charges a fee to check a home’s structure for defects and inspects items such as electrical wiring, plumbing, and heating and cooling systems. If the inspector detects problems, you should work with your real estate agent to determine how to best handle the situation. For example, you may have the opportunity to negotiate a lower home purchase price, or you can ask the seller to fix the problem prior to purchase. Average cost: $400.
Closing costs: Closing costs include a number of their own fees, and according to the Federal Reserve, they usually add up to approximately 3% of the home’s purchase price. Closing costs may include, but are not limited to:
Loan origination fee: Covers a lender’s administrative costs; also called origination points. Average cost: 1% of loan amount.
Survey fee: Covers the cost of determining the property’s boundaries. Average cost: up to $400.
Title insurance and recording charges: Charged by state and local governments to record your deed, mortgage and loan documents. Average cost: up to $400.
Discount points: An optional cost that allows borrowers to purchase points to lower a loan’s interest rate. Each discount point generally costs 1% of the total loan amount. Depending on the agreement between lender and borrower, 1 point can lower the interest rate by 0.25-1.25%.
Credit report: Covers the cost for a lender to pull a consolidated credit report to evaluate your creditworthiness. Average cost: $10 to $20 per borrower.
In addition to monthly mortgage payments, plan for a few other regular expenses once you become a homeowner.
Property or real estate taxes: Helps governments pay for public expenses like schools and parks. These taxes are calculated based on your home’s value, which means the more expensive your house is, the more taxes you’ll pay. The seller’s agent can provide the previous year’s property tax.
Private mortgage insurance (PMI): Protects the lender in the event that you default on your loan. Homebuyers who put down less than 20% toward their home may be required to pay PMI. Depending on your lender, costs can range from 0.5% to 1% of the total loan amount annually. However, Veterans Affairs (VA) mortgages are exempt, and some financial institutions, like Navy Federal, offer non-PMI loan options.
Homeowners insurance: Protects your home in the event of a fire, theft, vandalism and many weather-related occurrences (floods and earthquakes are typically excluded and require additional insurance). Your bank or mortgage lender has a stake in your home because they loaned you money for the purchase. To protect this investment, they may require you to purchase homeowners insurance.
Homeowners Association (HOA) fees: Monthly or quarterly dues paid to an organization that assists with the maintenance of community areas in your neighborhood, such as parks, pools and recreation centers or common areas in the case of condos or townhouses. If your home is subject to these fees, the seller’s agent can provide the previous year’s HOA dues.
Escrow: Money that you pay for property taxes and insurance that a lender includes in your monthly mortgage payment and holds in reserve. When the tax payment comes due, the lender uses the money in escrow to make the payment for you.
Utility and maintenance costs: Include things like water, electricity and gas, as well as the cost to maintain the home. To get a sense of how much you may pay in utilities, ask the seller’s real estate agent for an average. A home inspection can help you determine both utility costs (based on condition of water heater, insulation and other factors), as well as future maintenance needs.
Average costs noted may vary by lender, provider, geographic location and other factors.
With a complete picture of the costs you’ll encounter when buying a home, you can nail down your home-buying budget and pinpoint the maximum amount you can spend each month on a mortgage payment. Keep in mind that the loan amount you’ll be eligible to borrow will be contingent on your credit history, debt-to-income ratio and other qualifications specified by your lender.
The first step to identifying what’s affordable for you is to analyze your budget. Start by considering all sources of income you have. In most cases, if a person is contributing income toward the qualification of a mortgage application, that person must be an applicant or co-applicant on the loan in order for you to consider them as a source of income.
Next, you’ll need an accounting of all monthly, quarterly, and annual expenses and debts. Car loans, credit cards, student loans, child support and alimony should all be tallied.
Then, look back over the year to determine the total amount you spend on living expenses, such as groceries, utilities, entertainment and fuel. Don’t include the amount you’re currently paying in rent or renters insurance.
After subtracting your debts and expenses from your net income, divide the total by 12 to identify what a comfortable monthly mortgage payment might be. Remember—this payment must include homeowners insurance, taxes and PMI, if necessary.
Use a mortgage calculator to estimate your monthly payment, or speak to a loan officer to get prequalified.
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