Paying for a home is a costly transaction. The median price of a home in the country, as of September 2019, is just around $300,000. This number casts such a tall, expansive, and expensive shadow, that many accompanying costs hide in it and catch you unaware at the time of closing.
The hidden costs when buying a home add up to a substantial sum. Since they are broken down into different segments, and most of them are buried under the term of closing costs, most first time home buyers don’t properly plan for them.
You should be extra careful with your finances when you are buying a house. Saving for a down payment and securing a suitable mortgage are major parts of completing a home purchase, but there are a lot of small expenses that can cumulatively cost you a lot more than what you might have put aside for closing expenses.
Home Buying Hidden Costs
When you are saving for a new home, your first target is the down payment. An ideal down payment is 20% of the home price. If you have a good credit score and a 20% down payment, you are likely to get the best mortgage deal, and your hidden charges will also be relatively lower. However, if you can’t put down 20%, you add one cost right away, the Private Mortgage Insurance. It is usually around 1% of the mortgage value a year until the total home equity reaches 20%.
Let’s say you have qualified for a fixed mortgage rate for a home valued at $250,000. You were diligent in your savings, and you have 20% for the down payment. So you put down $50,000 and take out a mortgage of $200,000 that you will pay within 30 years. Neat right? You don’t need to pay any PMI, and your monthly payments are all planned out. If only it were that simple.
Loan Origination Fee
One of the first of the hidden costs when buying a home is the fees your lender will charge you when processing your loan. It can either be paid upfront or at the time of closing. But the amount/percentage of the loan origination fee is decided right in the beginning. It can be somewhere between 0.5% and 1% of the mortgage value. If your credit score is excellent, you will qualify for a lower origination fee. It will come out to $1500 for a 0.75% of your $200,000 mortgage.
Inspection and Appraisal Fee
Inspection and appraisal are both necessary parts of a home purchase. The home inspection is almost always paid upfront, and the appraisal fee is mostly paid upfront too. It can sometimes be rolled in with the other closing fees.
This year, the average inspection fee has been $315, and an average appraisal fee has been $350, totaling in $665, another of the hidden costs when buying a home.
Earnest money is what you pay to the home seller to accept your offer and take their house off the market. It is also called faith money, indicating that you are serious about buying a home and not just posing for the seller to drop the price. It is usually between 1.5% and 3% of the value of the home. For your $250,000 home, 2% earnest money would be $5,000.
However, this amount will be deducted from your final payment of the house, but you have to place it in escrow before you make the final payment.
Owner’s and lender’s title insurance is another expenditure home buyer usually don’t account for. It is to protect the owner and lender from legal implications associated with the title and ownership of the property. The average title insurance is around $1,374.
You may or may not have to pay a property transfer tax that as a buyer. It can be imposed on the state level, county level, or both. Usually, transfer tax is on the seller’s head, but in some states, buyers are liable for this tax.
When you are buying a home, you know you will be paying the property tax on it. You might not pay it much heed because it will be lumped together with your monthly mortgage payment. When you buy a home, its value is reassessed, since its value will have increased, you will end up paying more on the property tax than the seller was paying.
It’s also rolled together in your monthly mortgage payment, so you don’t know much about it, but it’s there. On average, you might be paying $1,400 a year in the home owner’s insurance.
In a lot of cases, you may be expected to put a set amount in escrow to take care of your first year’s expenses like property tax, homeowner’s insurance, and other small expenses. At the very least, this amount will be the sum of homeowner’s insurance and the property tax for a year. So on average, it may come out to $4,300 ($1,400 + $2,900). $1,400 is insurance, while $2,900 is the property tax on your $250,000 home, according to average rates.
When you move in a property that comes under a homeowner association (HOA), you may have to pay an HOA transfer fee (the seller usually pays it). But you’ll definitely have to pay the monthly HOA fees as the new homeowner. It varies a lot, but it often falls somewhere between $200 and $500.
All these numbers come down to a sum that’s 5% of your home’s value. A significant chunk of it will be redeemed in your final payment, but it’s still a significant amount. The closing costs of buying a home usually fall between 2% and 5% of the value of the property. And that’s before you account for moving, maintenance, utility transfer, and other costs associated with moving in a new home.
The amounts may vary from state to state, but one thing is pretty clear. You have to plan ahead for these expenses. Ideally, you have to save up to 30% of the value of your home before making the purchase. 20% flat will be going into the down payment. Around 3%, at least, will be going into the hidden charges of your closings costs. 2%-3% will be your agent’s commission. That will leave you with around $11,000 to manage your other expenses after moving in.