A mortgage is the most significant expense associated with buying a home but not the only cost. First-time homebuyers are encouraged to get pre-approved to know how much they can afford to pay for a home, but there are other costs, and you must know what they are as you prepare to become a homeowner.
You have probably heard of down payments and closing costs, but what is the correct amount for a down payment, and what is included in closing costs? Upfront costs or costs to be paid before you close on your new home include the down payment, closing costs, and the earnest money deposit.
The down payment is the amount you put down to buy the home. The amount can range anywhere from 0% to 20% of the sales price of the home or more. The down payment can vary depending on the loan type. It also dictates how much you can borrow, your monthly payment amount, and even your interest rate. In some cases, you can use gift funds for a down payment. Gift funds often come from a family member and must be documented to be accepted. Another way to get assistance with down payment and closing costs assistance is to check into programs offered through the State in which you live. For example, in Florida, a program called Hometown Heroes allows eligible first-time homebuyers in frontline worker professions to get up to 25K in down payment and closing cost assistance to afford to live in the communities where they work. Most states have similar programs, and you should ask your loan officer what may be available to you.
Another upfront cost you need to plan for is called earnest money. Your earnest money deposit is required when your offer to purchase a home is accepted. Therefore, you need to have that money saved in advance. While your down payment can come from selling your current home, earnest money needs to be accessible before you start house hunting. It signifies that you are serious about buying the home, and it can run between 1% and 5% of the sale price. The earnest deposit goes into an escrow account until the end of the transaction, and at that time, you can use it to go towards the down payment or closing costs.
Closing costs are fees that the borrower must pay to third-party vendors who provide services needed to get the loan cleared to close. Closing costs typically run between 3-7 % of the loan amount. Closing cost items are usually paid for by the buyer, but in some cases, the seller, realtors, or another party will contribute. These fees are typically collected by the lender and paid by the settlement agent to the vendors to make it easier for the borrower.
Here are some of the fees required to close a mortgage loan:
Appraisal Fee – the fee paid to the professional appraiser who will assess the value of the home you want to buy. Since the house is the collateral or guarantee for the mortgage, your lender needs to know that the property’s value covers the loan amount. Therefore, most lenders will not provide you with a mortgage loan amount greater than what the appraiser determines is the property’s fair market value.
Credit Report Fee – the cost of getting copies of your credit report to assess your mortgage loan application. Your credit score included in your credit report is one of the most critical factors in determining your interest rate on your mortgage.
Title insurance & Title Services Fees – the fees paid to a title company to search county records to make sure that the title to the property you wish to buy is clear and free of any complications like pending debts or liens.
Government recording fee – the fee required to register the property under your name and record the mortgage or deed of trust.
Homeowners insurance – this charge is for the insurance you must buy for the property to protect you from a loss associated with a fire or other disaster. Homeowners can let the lender pay the insurance from an escrow account.
Initial deposits for an escrow account – the money you are required to pay in advance to establish your escrow account so that the lender can pay for homeowner’s insurance, taxes, and other charges.
After your loan closes, you will pay your monthly mortgage bill in one payment, but it consists of four parts. They are the principal, interest, taxes, and insurance. The principal is the amount of money that goes towards paying off your loan amount. The interest is the fee for borrowing money from your lender. The interest will make up the bulk of your payments early on. The next component of your monthly payment is property tax. Property tax refers to a percentage of your home’s assessed value paid to your local government. And finally, your monthly payment includes homeowner’s insurance and may also include mortgage insurance which is required if your down payment is less than 20% or if you choose certain loan types. Mortgage Insurance requirements vary by loan type, and your loan officer will be able to explain this in more detail.
Taxes and insurance are typically held in an escrow account and paid on your behalf by your loan servicer, although you can request not to have these funds held for you, depending on your loan type. The payments are reviewed each year and adjusted as needed. Generally, most homebuyers choose to have an escrow account as it helps to ensure you’ll have the funds to pay your taxes and insurance on time.
And finally, don’t forget about the other fees and expenses you may incur. For example, you will need to pay for moving costs, annual maintenance and repairs, utility bills, and Homeowner’s Association fees if you purchased a condo. You might also want to buy new furniture and make some decorating and design updates.
Considering all these costs, is it really worth buying a new home? Again, we say, “YES!”
The price you pay to rent an apartment or home is likely about the same as or maybe more than a mortgage payment. And you don’t get the benefits of home ownership when you pay someone else’s mortgage.
- Building Equity-When you own a home, your monthly payments build equity over time. You also gain equity when your home appreciates as the prices rise in your neighborhood. Both increase your net worth, which helps to build wealth.
- Stable Payments-Rent payments increase over time, but your mortgage payments will stay the same with a fixed-rate mortgage.
- Tax Benefits-Real estate property taxes, interest, and origination fees may be deductible on your income taxes. You would need to discuss the exact benefits with a tax accountant.
- It belongs to you! – Buying a property gives you the flexibility to change the wall colors, install hardwood floors, get a pet, and make other changes that make the house a home. A huge benefit to owning a home is the stability it provides and how it allows you to become part of a community.
Every homebuyer must decide if the costs of buying a home are worth it. Building wealth and stability are powerful forces that drive people into the market every day. First-time homebuyers in this market can be successful if they know the upfront costs and work with a professional loan officer who can help them build a strategy and answer questions.
