The Hidden Costs of Buying Your First Home
Buying your first home can be a great way to build wealth and have a place to call your own. Saving for the down payment is a huge accomplishment, but remember, the sale price is hardly ever what you actually end up paying. Be sure to factor in some of these often overlooked costs when you're planning your home-buying budget.
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Closing costs can be a big shock for some buyers, especially if this is their first home. These fees can be between 3 percent and 5 percent of your sale price, which adds up to $3,000 to $5,000 on a $100,000 house. Those fees typically cover:
- Legal fees
- Credit report
- Title fees and insurance
- Courier fees
These costs can hurt, but remember, everything is negotiable when it comes to buying a house!
HOAs can provide some great amenities, like pools, tennis courts, or a yard service. But those amenities come with a price. Be sure to ask how much you're expected to pay and when that payment is due. Remember, not paying is not an option either. In the past, homeowners have been forced out of their homes after not paying their HOA fees.
VA loan funding fee
If you're using your VA loan benefits to buy your home, you'll be expected to pay a funding fee along with your mortgage payment. This fee helps cover any losses on the very few VA loans that default. The fee is set as a percentage of your home's value and varies based on whether you're regular military personnel or if you're in the reserves or national guard. The good news about this fee is that you don't have to pay it all upfront, most people choose to roll it into their monthly mortgage payment.
Private mortgage insurance
Saving 20 percent for a down payment can be a pretty daunting task. That's why many people choose to use a first-time buyer program or to simply pay private mortgage insurance on their loan. This is an additional monthly fee that lenders require for anyone who puts less than 20 percent down. The good news is you won't be paying this fee forever. Once you reach the midpoint of your loan or 80 percent of your loan to value ratio, you can apply to have it removed.
Costs that were covered by rent
When you're renting there might be certain costs that are rolled up into your rent. Some apartments include things like water or internet in their flat monthly rent fee. Remember to factor those in when you're creating your new home budget.
Homeowners insurance and taxes
While you have a mortgage, you're also required to have homeowners insurance.
Many homeowners don't pay their insurance and taxes in one bundle, they opt to use an escrow account instead. In this case, your monthly mortgage payment isn't just your interest and principal every month, you'll be paying interest, principal, taxes, and insurance.
The amount you put into your escrow account might change year to year because the cost for your taxes and insurance might increase or decrease based on the value of your home.
If you're not great at saving, or if those payments are just something you don't want to think about, then escrow accounts are a lifesaver. The accounts also help reduce lender's risk because they have the assurance that you'll be able to pay your taxes and insurance. If you decide not to use an escrow account, you may end up paying more in interest to help lenders reduce their risk.
So, remember to keep some extra money in your savings account when you're figuring out how much you can afford to spend on your home.