When you come across a cheap mortgage offer, you might think, “Great! I can afford my dream home. “You may be able to do this, but the cost of buying a home goes beyond paying the mortgage. To determine how much home you can afford, it is important to consider additional costs such as closing costs, insurance, and taxes before taking out a mortgage.
Complete cost of buying a home
Matt Hester and Ross Hester, co-founders of Hester Group’s father and son, Harry Norman Realtors in Atlanta, Georgia, encourage all of their customers to prepare for the funds required to purchase.
“If you don’t include all of the costs, your monthly spending budget can be turned upside down,” says Matt Hester.
These costs include:
The down payment is the part of the purchase price of the house that you pay upfront rather than using a mortgage to finance it. For example, if you buy a home for $ 200,000 and save 10 percent or $ 20,000, you get a $ 180,000 mortgage.
If you opt for a conventional loan or an FHA loan, a down payment is required. The amount of the down payment required depends on the price and type of home as well as the loan product.
With a traditional loan, exactly how much depends on the lender and the type of loan. You can set 3 percent, 10 percent, 20 percent, or more. With an FHA loan, you could cut as little as 3.5 percent.
It is important to note that there are no down-payment loans: USDA loans for borrowers buying in certain markets (generally in the country) and VA loans for eligible service members and veterans.
In order to complete your home loan and get the keys to the property, you will need to pay the closing costs, which are all fees associated with the mortgage. These typically range from 2 to 5 percent of the loan capital and can include:
– Registration fee
– Evaluation fee
– Credit check fee
– Origin and / or subscription fees
– Title insurance
– Title search fee
– Transfer tax (if applicable)
“There are a number of standard end-table items where the actual cost will vary based on the value of the home and the partners you work with,” says Ross Hester.
However, if you are in need of savings, many lenders offer a no closing cost mortgage option, where the closing cost is added to your loan capital or otherwise paid in the form of a higher interest rate. Either of these saves you the need to close cash, but can cost you more in the long run, especially if you intend to stay home for the long term.
In most countries, your city or county government requires you to pay property tax on your home for as long as you own it. Typically, property tax is included in your monthly mortgage payment, but separately from interest and principal.
For example, if you own a home with an estimated value of $ 100,000 and the tax rate is 2 percent, your annual property tax is $ 2,000, paid in increments of $ 167 on each of your 12 monthly mortgage payments during the year.
Note that the value obtained does not match the price you paid for your home. If home values in your area go up, your city or county could value your home higher, which means you will pay more property tax.
Homeowner and Mortgage Insurance
There are two types of insurance to consider when buying a home: homeowner insurance and personal mortgage insurance (PMI).
Homeowner insurance protects you financially against unexpected events that damage your home, such as natural disasters, theft or vandalism. Although homeowner insurance is not required by law, most mortgage lenders require it in some form. The cost varies significantly, and there are many options. It is therefore best to compare offers in order to keep costs as low as possible.
Generally, if you’re getting a conventional loan, PMI is required if you’re cutting less than 20 percent. This type of insurance protects the lender if you default on the loan and can greatly increase your mortgage payment. According to the Urban Institute, annual PMI premiums are between 0.58 and 1.86 percent of the loan amount.
However, PMI is not permanent. By paying back your mortgage and building equity in your home, you can get rid of PMI.
If you are buying a condo or other type of home in a community that is regulated by a homeowners association (HOA), you will likely have to pay a monthly fee called the HOA fee. The HOA fees are set by the association and vary widely. These funds go towards the club’s services, which can include security, a pool or gym, and landscaping and maintenance.
HOAs may also occasionally charge special assessment fees for urgent repairs. These financial obligations can be overlooked when buyers add up the cost of buying a home, but they add up quickly.
House maintenance, repairs and utilities
No matter where you live, you need to plan the maintenance and repair of your home. Wear and tear occurs, so it is important to have additional funds available for repairing or replacing equipment and critical structures and systems such as the roof or air conditioning.
Many experts recommend budgeting 1 percent of the value of your home for home maintenance each year and setting up an emergency fund to resolve urgent, unbudgeted problems if they arise.
You’ll also have to pay for utilities, likely including water, sewer, gas, and electricity. These costs vary by location, but the general rule of thumb is the larger the property, the more ancillary costs there will be.
Home prices today
The price of the home you have bought is undoubtedly an important factor in your total cost. If you are looking to buy a home today, expect higher prices and tougher competition. According to the National Association of Realtors, the median price of existing homes was $ 329,100 in March 2021, an increase of 17.2 percent over the same period last year. Existing single-family home prices were a record high of $ 334,500, an 18.4 percent year-over-year increase. According to the US Department of Housing and Urban Development, the average price for a new home was $ 330,800.
Keep in mind that property prices in your market may be much higher or lower than these national numbers. The price you pay also depends on the type of property you are buying.
The cost of buying and owning a home can add up quickly. Hence, it is important to prepare for it. You want to save money, improve or maintain your credit score, and compare lenders to get the best mortgage rates possible.
“When it comes to determining their budget based on their individual situation, lenders, accountants, and financial planners are the people buyers should turn to,” says Matt Hester.
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