So you want to buy your first home. You’ve created your budget, gotten pre-approved, and maybe you’ve even started looking at houses.
But have you accounted for everything? If you are a first-time home buyer, there might be extra fees, costs and taxes you aren’t aware of. Some of these costs might be small and inconsequential, but others could have a damaging effect if you aren’t prepared for them.
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Closing costs are a commonly used term when it comes to buying a home. People ask about closing costs, they’re talked about in the media, but what do they consist of, exactly, and how much can you expect them to actually cost?
In a sense, closing costs are the different fees and payments associated with everybody who was involved in the home buying process. This includes things like paying the attorneys who looked over your contracts, appraisals, home inspections, paying an escrow company, taxes, and typically a first payment on different insurances needed.
Closing costs vary from state to state, but they typically cost about 2% to 5% of the total worth of the mortgage loan. That means if you get a $100,000 mortgage loan, you can expect an additional $2,000 to $5,000 in closing costs.
When you’re getting a mortgage loan, it’s a common practice to get homeowner’s insurance. The lender often requires it, and the buyer has to pay for it. The total cost depends on the amount of coverage you want and the lender requires, but expect to have it be a normal, yearly expense.
Lenders require home insurance because a mortgage is a secured loan, with the home being the collateral. The lender is simply trying to protect their interests, and what the loan is based off of.
Paying for your first year of home insurance is typically a part of your closing costs, but after that it will be a separate cost. Home insurance costs vary between states and coverage, but the national average premium is about $1,211 a year.
Private Mortgage Insurance
Another common fee first-time home buyers encounter is private mortgage insurance (PMI). If you are unable to put down a 20% down payment on your home, many lenders require PMI. Homeowners have to keep PMI until they pay off 20% of the loan.
PMI covers the lender, not the homebuyer. Basically, it’s an insurance policy against you defaulting on the loan. Often, PMI is grouped as part of your monthly mortgage payments, but could also be a lump yearly sum. Typically, PMI costs 0.5% to 1% of the total mortgage on a yearly basis. So, if you have a $100,000 mortgage, a PMI can cost about $500 to $1,000 a year, or $41 to $83 extra a month.
PMI isn’t a permanent fixture in a mortgage. Once you have paid for 20% of the loan, many lenders will drop the need for PMI, or allow you to refinance the loan and remove it.
Furnishing and Appliances
It’s possible you’ll have some furnishings from before you buy a house, but it’s likely you’ll need or want to buy more. These costs can quickly deplete a new homeowner’s already hurting bank account, but many deem it a necessary purchase. You’ve got the perfect house, now you need to fill the walls and the empty spaces. It is possible to furnish a home for cheap, but you’ll still be spending money.
It’s also likely you’ll need to purchase expensive appliances too. Many (especially new) homes don’t have necessary appliances like fridges, ovens, microwaves, washers and dryers and more. This cost only arises if these aren’t included in a home, but if they aren’t there, expect to spend a few thousand dollars. Other times, even when they are included with the home, you may want or need to replace them because they are out of style or no longer operating effectively.
Once you get the home, it is up to you to care for, maintain and improve it. There is no more landlord to call when something breaks; it falls to you.
If you bought an older home, you can expect that more money will be required for general maintenance. This can include larger repairs like replacing a roof or repainting, and small but constant repairs like a broken sprinkler line. Even if you have a new home, things will still eventually break and need to be addressed.
If you are handy, you can try fixing these problems yourself; otherwise, you’ll need to call a professional. Either way, money will be spent fixing and replacing things, it just depends how much you want to spend.
Now that you know about the hidden fees of buying a home, you can be better prepared to manage them. It’s important to remember these hidden fees, as they can raise the price of your loan.
Often, lenders don’t take these expenses into account. Before signing a loan agreement, be sure to do the math with hidden costs, even if it’s just an estimate. That way, you won’t have any nasty surprises because you’ll be prepared for them. Ultimately you’ll (hopefully) be less stressed during the home buying process.
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