Buying a home is a little different from most transactions you encounter in everyday life. The listed price isn’t the only cost you have to pay; just like you have to factor sales tax into the price of a purchase at a store, there are significant additional costs to factor into your purchase of a home.
If you’re in the market for the first time, you might not be aware of all the fees you need to pay. To prepare yourself for the total cost of buying property, here is a list of some of the expenses that you might face as a first-time home buyer and what they entail.
The down payment is the cash you have to pay towards the property upfront before the bank gives you a mortgage. It goes toward the total cost of your home, but it must be paid first upon buying instead of being factored into your loan.
Typically, down payments are around 20 percent of the home’s total cost. If you can pay Lenders Mortgage Insurance (LMI), you may be able to reduce this to as little as 5 percent. But if you can pay more for your down payment upfront, it will lower the overall cost of your loan and the added interest you’ll have to pay over time.
A home inspection is a type of examination of a property to ensure no obvious or severe faults have been omitted from the sales description. Many first-time home buyers are unaware that they will be responsible for the cost of a home inspection, but it’s often included in your contract.
The price you pay for a home inspection depends on the size of the property. Small houses usually cost somewhere between $200 and $300 to inspect. Average-sized residences cost between $400 and $500, and the most extensive inspection in the priciest areas might cost up to $1000.
Closing costs are fees that buyers and sellers incur at the end of real estate transactions and include taxes, deed recording fees, credit report charges, appraisal fees, and title searchers. The average US home buyer pays $5,749 on these.
Property taxes are levies imposed by state and local governments on owners of real estate. Usually, the tax is a percentage of the “fair market value” of the property. Typically property taxes are somewhere between 1 and 2 percent per year.
HOA fees are money you pay a Homeowners’ Association for general upkeep. This will be a monthly payment added to your mortgage payments. If you’re buying in an area with a Homeowners’ Association, it’s important to be aware that these fees will increase your monthly payments.
You’ll also want to take part in HOA elections to understand where your fees go and to determine who is elected to the board. Most communities work with HOA election services to achieve unbiased results.
Home insurance covers the losses relating to the building itself and contents. Typically, homeowners pay an average of $1,445 per year, or $120 per month.
One of the critical things you’ll need to decide on before closing on a house is the homeowners’ insurance policy you want to take out. Since the full amount of the coverage depends on the home’s value following an appraisal and is determined by the lender, you’ll need to purchase a homeowners insurance policy before your closing date.
It is critical to find a reliable insurance provider to ensure that you don’t overpay or get less coverage than you need. Remember, the insurer cares about your property’s “fair value,” not the amount that you buy it for. It could be that you wind up paying more for your property than it is actually worth.
In that case, you’d like the insurer to provide an appraisal of the actual value so you don’t wind up taking out more coverage than you need. Similarly, if you buy a property for a bargain and your insurer bases your insurance policy on that, you could wind up with less coverage than you need—again, not something you want.
With these costs and tips in mind, you should be prepared for the “surprise” costs that can catch first-time buyers off-guard.