Many people are shocked to learn how expensive it is to buy a home. There are the initial costs of purchasing your property and there are ongoing expenses that continue as long as you own the property. One of the most important things to do before buying a house is to prepare financially by saving enough money to cover the initial costs and to create a financial cushion for the ongoing expenses.
Lenders often require a cash down payment, typically 20% of the purchase price, in order to approve a mortgage. As an alternative to a large down payment, you can buy private mortgage insurance to protect the lender in case you default. If you do that, the down-payment can be as low as zero to five percent of the purchase price.
Mortgage lenders charge closing costs to cover the processing of a real estate sale. Lenders are required to give you an estimate of the closing costs before you apply for a mortgage. Typically, they range between 3% and 6% of the purchase price of the home and include the following:
- Origination fees to cover the administrative costs of processing a the loan
- Discount points (optional) to lower the interest rate
- Appraisal fees to cover the cost of getting a property value estimate
- Credit report fees to cover the cost of getting a copy of your credit report
- Mortgage insurance, hazard insurance, and title insurance
- Recording fees and surveyor fees
- Prorated property taxes
Costs of moving in
When it's time to move in, you will need money to pay the movers, buy items for the house, and make repairs. You might be tempted to use credit cards to cover these expenses, but it is better to have money set aside for move-in expenses.
Mortgage payments, property taxes, and insurance
A mortgage payment includes the principal and interest on your home loan. It can also include a monthly payment to an escrow account set aside for property taxes and insurance. When the tax and insurance bills are due, the lender will pay the bills using the money in the escrow account. Escrow accounts are not required. You can choose to pay the tax and insurance bills yourself.