Buying a home requires more than money for a down payment. Upon buying a home, other costs of living increase. Because purchasing a home is an investment, careful calculation of costs prior to purchase will result in a better long-term return. Costs of buying a home fall into three categories: Closing Costs, Monthly Expenses and Moving Costs.
Closing Costs
The most easily calculated costs of buying a home are the closing costs. Closing costs encompass everything for which you must pay when “signing on the dotted line” at time of closing, or settlement. Closing costs include several types of fees, taxes, interest, insurance and a down payment. At the time of possession, the buyer presents a certified check for the closing cost amount.
Components of Closing Costs
Down payment
The down payment will vary with the type of loan chosen, and cost of the home. First-time home buyers may qualify for a HUD loan requiring less of a down payment. It is not always necessary to have a ten percent or twenty percent down payment prior to buying a home. Typically, until your equity in the home reaches twenty percent or more, you will be required by your mortgage company to carry Private Mortgage Insurance (PMI).
Fees
Included in closing costs are fees related to the process of buying a home. You will likely pay a Loan Origination Fee to the broker who originated your loan. Fees for the appraisal, attorney work, credit reports, title insurance, recording at the local register of deeds, home inspection, pest inspection, flood certification and various courier and mailing fees will be included in the closing costs.
Taxes
Closing costs upon settlement will include property taxes, city and county taxes to be placed in escrow. This ensures that funds are available when taxes are due.
Insurance
Mortgage companies require that home buyers pay up front for their first year of homeowners insurance and other insurances. As mentioned above, with less than 20 percent equity, homeowners typically must also carry Private Mortgage Insurance.
Interest
It is in the buyer’s best interest to close near the end of the month. At time of closing, the buyer will pay prorated interest for what remains in the month. The fewer days between the end of the month and closing, the lower the interest amount needed at closing.
Monthly Expenses
Monthly expenses should be figured into the cost of buying a home. It is important to not purchase a home beyond ability to pay. Included in monthly expenses will be the mortgage payment, utilities, and repair expenses.
Mortgage Payment
The mortgage payment will include payment to interest (cost of financing the loan), payment to principal (equity in the home), taxes and insurance. Taxes and insurance money is held in escrow until payment is due. The mortgage payment will therefore be more than just payment to principal and interest.
Utilities
When investigating costs of buying a house, monthly utility costs must be factored. When moving from renting to owning, additional utilities come into the picture. New expenses will probably be in areas of water, sewer, trash, and storm water treatment, all of which may add between $200-$300 to monthly utility expenses.
Repairs and Maintenance
Even with a thorough home inspection and re-inspection, wear and tear occur and repairs and maintenance become necessary. If the home does not come with a warranty, one may be purchased at a relatively low cost. Then, the homeowner pays only the cost of the service call. If a warranty is not in place, estimate between $100-$400 monthly to pay for licensed service calls and maintenance materials.
Moving Costs
Included in the cost of buying a home are moving expenses. Whether the home buyers move themselves or contract with a moving company, costs of renting trucks, buying packing materials, time away from work, transferring utilities and cleaning each residence may add between $2,000-$3,000, minimum, to the cost of buying a home. Out of state moves will add higher costs.
Calculating the costs of buying a home involves three major areas: Closing Costs, Monthly Expenses and Moving Costs. All three categories of expenditures must be figured in the cost of buying a home in order to be realistic while home-shopping. By carefully calculating costs of buying a home, the buyer ensures the process will be a rewarding experience and an investment in the future.