Venturing towards homeownership can be daunting, especially when faced with the many financial intricacies involved in the process. Many prospective homeowners are often advised to make at least a 20% down payment, while others are encouraged to focus more on securing a reasonable interest rate. Interestingly, first-time homebuyers on average only put down approximately 7%. Partnering with industry professionals like those at Crosscountry Mortgage can help guide you in making an informed down payment decision based on your unique financial objectives. However, the down payment is merely the tip of the iceberg. There are multiple other costs to account for throughout the homebuying journey and even after moving in. Let's demystify these costs.
Expenses During the Home Buying Process
Beyond the down payment and mortgage, homeownership entails additional costs. It's important to understand that the preliminary costs associated with a home loan transaction are comprehensively detailed in the Closing Disclosure Form.
Down Payment: Conventionally, the down payment is usually 20% of the home's purchase price. However, there are loan options which require as little as 3.5% or even no down payment at all for qualified borrowers.
Mortgage Insurance (MI): This is a safeguard for the lender in the event the buyer defaults and the loan goes into foreclosure. Required for conventional loans with a down payment of less than 20%, MI is also typically required on FHA and USDA loans. For conventional loans, MI can be removed once the loan balance drops to 78% of the original value of the home.
Appraisals: Appraisals are assessments conducted by professional appraisers to confirm the home's current market value and are among the initial steps in the closing process. Although they typically cost a few hundred dollars, this expense can often be incorporated into the loan amount.
Closing Costs: These are expenses associated with finalizing the home purchase, charged by all parties involved in the transaction, such as the lender, real estate agent, and other third-party entities. These costs, which can sometimes be included in the loan, encompass government recording costs, appraisal fees, credit report fees, lender origination fees, title services, tax service fees, survey fees, attorney fees, underwriting fees, and more.
Earnest Money: This is a deposit made by the buyer at the offer stage to demonstrate serious intent to purchase. Typically, this is between 1-3% of the purchase price and is held in escrow. While this is not a separate expense—it applies to either the down payment or closing costs—it's worth mentioning due to its upfront nature.
Homeowners Insurance: Lenders typically require proof of homeowners insurance to ensure that the mortgage will be paid off, or the property will be repaired or rebuilt in case of a disaster. Additional coverage like flood or earthquake insurance may also be considered.
Moving Costs: Small expenses can quickly accumulate during a move. Items like moving trucks, boxes, movers, new appliances or furniture, maintenance costs, and monthly bills should be factored into your budget.
Ongoing Homeownership Costs
After the finalization of your purchase, and you're officially a homeowner, there are other expenses to consider that you likely didn't have as a renter.
Property Taxes: Always verify the property tax rate for your new home as rates can fluctuate depending on local amenities such as schools and fire districts.
HOA Fees: While they may occasionally be a burden, HOA fees often provide access to amenities such as gyms, spas, tennis courts, and enhanced security. New homeowners can expect to pay between $200-$400 a month on average for these services, particularly those residing in townhouses or condos.
Home Maintenance: The average homeowner spends around $2,000 annually on maintenance services. While this may seem manageable spread out over 12 months, are you prepared for unexpected house emergencies? Depending on your location, additional expenses may arise due to extreme weather conditions or regular lawn care.
The Power of Planning
At first glance, these numbers may seem overwhelming, but with strategic planning, the path to homeownership can be smoother than anticipated. Whether you are ready to buy now or in the future, it's crucial to start planning and saving early to avoid unexpected financial pitfalls once you've secured your new home.
Crosscountry Mortgage is here to assist in your planning process. Reach out to a local Mortgage Advisor today for a complimentary consultation to learn more about your loan options and to navigate any state and county maximum loan amount restrictions.
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