7 Costs to Consider Before Buying a Home
A lot of first-time homebuyers are shocked by the hidden costs associated with the process. While they know that owning a home means having a mortgage, they often misunderstand all the nuances that go into one-time and monthly payments. If you’re thinking about buying a home, here are some necessary costs to consider before buying a home.
The down payment is one of the biggest hurdles for buying a home. The recommended down payment is 20% of a home’s selling price. For a $200,000 home, you’d need to have $20,000 in cash sitting in the bank. While it’s always possible to set goals and save, it can take years.
There are mortgages available without a 20% down payment. However, these lead to different costs. Lower down payments put the bank at risk; if you want to go this route, you should check your credit score first. Generally speaking, the better the credit score, the better the mortgage. You may also have to pay extra insurance on your mortgage to cover the loan.
Mortgage payments don’t just cover the cost of a home. They’re made of the premium (the price of your house) and the interest (the fee for borrowing money). The longer your mortgage term, the lower your payments may be. However, you’ll end up paying more interest by the end of it all.
Your mortgage schedule also impacts how much you pay over time. Interest is compounded, so the ratio changes with each payment. Additionally, bi-weekly payments end up paying more on your mortgage each year, giving you the potential to pay it off early.
Beyond your down payment and mortgage payments, there are many one-time fees associated with buying a home. You will have to pay a land title transfer fee and legal fees. Before purchasing the house, you’ll also be paying for an inspection and possibly a land survey.
Closing costs can reach upward of $5,000, depending on the region and complexity of the sale.
If you’ve been a renter so far, understanding the true cost of utilities can be shocking. Some costs you’ll have to cover each month include:
- electricity costs
- heating costs (oil, for example)
- water costs
These often cost more in a house than an apartment due to size and lack of insulation. For example, if you lived in an apartment on top or between other occupants, you’d get residual heat from their dwellings, driving down your costs.
Property taxes are another surprising cost for new homeowners. This charge is an annual fee for being allowed to own land where you do. These fees are meant to go toward road maintenance, schools, etc. The nicer the area, the higher your property tax will be. This annual fee is calculated as a percentage of your home’s value.
As a homeowner, you’ll need to pay insurance on your house and property. This is a necessity to protect your investment. If your house burns down and you have no insurance, you will have no home, but you’ll still have a mortgage.
If you pay a low down payment, you may also require mortgage insurance to cover the bank’s losses if you default on the loan.
The best part of renting is that someone else is responsible when things break. Annual maintenance costs can be relatively low if you work to keep your property clean and secure.
However, every once in a while, something will go wrong that requires a big investment. This could include anything from pipes bursting to replacing an old roof.
Buying a home is one of the biggest life decisions you will face. Take time to weigh the options and understand the costs, so that you can prepare yourself.
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