The Hidden Costs of Buying a Home

5+ expenses that will impact what you can really afford

Scrolling Zillow and other real estate listings is a fun way to figure out what you do and don’t want in a home. What it’s not so great for is figuring out is home is how much a home is actually going to cost you. That’s because in addition to the sale price of the home, there are a number of other expenses related specifically to the home-sale transaction and others tied to the privilege of being a homeowner that you need to consider when determining what you can actually afford. 

Here's a look at some of the expenses you need to be prepared to cover on the way to buying your home.

1. Earnest Money
   Essentially a good-faith deposit, earnest money is a way for a buyer to demonstrate to a seller that they are serious and intend to go forward with the agreed upon sale. Earnest money is typically turned over when the purchase agreement is signed and ranges between 1% to 3% of the home’s purchase price. The money is held in an escrow account, often with the list agent, until closing. If the sale goes through, the money is used towards the buyer’s down payment and closing costs.
    
2. Home Appraisal
   Unless you’re a member of the 34% of homebuyers who are paying all-cash for their home, you’re going to need a mortgage, which means you’ll also need a home appraisal. Typically running $400-600, an appraisal is performed to determine the fair market value of the home based on the property’s condition, location, size, and recent comparable sales. Your lender will use the info to determine the interest rate and required down payment for the property, and whether you will be approved for the loan.
    
3. Home Inspection
   Depending upon the size and location of your property, a home inspection can run you between $300-600. But, trust us, it’s worth every dollar. The purpose of an inspection is to uncover any problems with the home. This may include water damage, hidden mold, structural issues, problems with the HVAC, etc. If the inspection turns something up you have several options: a) you can walk away, b) you can have the owner repair the issues before proceeding with the sale, or c) you can have the owner lower the sale price to cover your cost for addressing the issue(s).
    
4. Loan-Origination Fee
   The loan-origination fee is part of the closing costs you pay when the mortgage is finalized. The fee is paid to the lender to cover the cost of processing your loan. Loan-origination fees usually run .5-1.5% of the mortgage value.
    
5.  Closing Costs
   Homebuyer closing costs are sort of a catchall of fees and expenses for a variety of efforts that will ensure the home you buy is yours free and clear once you close. They include costs for:

• - Title search: this confirms the seller is the legal owner of a property and identifies any outstanding claims or liens against the property
• - Property tax (pro-rated for the time you will own the home)
• - Recording fee: paid to the county to make your purchase part of the public record
• - Title insurance: protects you from someone else every trying to lay claim to your property
• - Flood determination
• - Lender’s policy title insurance: a mandatory fee, lender’s policy title insurance demonstrates to the lender that you own the home and that the mortgage is legitimate
• - Underwriting fee: paid to the lender, this fee covers their expense for reviewing the complete loan application for approval
• - Pre-paid interest: paid to the mortgage lender, this expense represents the interest on your loan, paid up to the point where you are 30 days away from your first loan payment
• - Private mortgage insurance: if you’re putting less than 20% of the purchase price toward your down payment, you’ll likely need to take out private mortgage insurance (PMI), which many lenders require to offset their risk. The cost of PMI is based on several factors, including the amount of your mortgage, your down payment, your credit score, and loan terms

And of course there are other expense like the cost of moving, appliances, furniture, lawn and yard equipment, fees for setting up utilities and services, and ongoing monthly and annual expenses like trash removal, school taxes, property taxes, etc. that you also need to consider when determining if you can truly afford a home.

As overwhelming as it all sounds (and it is), it is better to be aware of the true cost of potential homeownership before beginning the buying journey.

To learn more, you can Request a Meeting on our Mortgage section of the website.

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, investment or legal advice.