Buying a home is a big commitment. For most of us, it will be the biggest purchase we make in our lifetime. According to the National Association of Realtors, it also usually ties us to one place for about 12 years. Of course, the process is about more than finding a home you like. It’s about finding a home you can afford and enjoy for years to come. And the price tag you see isn’t the full story. It’s important to consider all of the financial factors of home ownership before you sign any dotted lines. Here are five costs to consider before buying a home this year (or any year!).
1. Down Payment
Home listings can be intimidating – even the ones you can afford! In reality, you only have to pay a portion of a home’s value to secure your purchase. This initial payment is known as a down payment. Generally this is the amount of money you provide the seller upfront and secure a mortgage to cover the rest. You then pay a mortgage lender back that loan. Typically, down payments range from 5% to 20%. The larger the down payment, the less you’ll owe on your mortgage each month and the less interest you’ll pay over time.
2. Monthly Mortgage Payment
A down payment is your first step, but you’ll also have to keep up with your mortgage. These monthly payments consist of a portion of your loan’s principal, which is the total amount borrowed, and interest, a percentage of the principal that goes to the lender. A mortgage calculatorcan help you determine what you should expect to pay. The exact amount will depend on the value of your home, the size of your down payment, the interest rate you qualify for and the length and terms of your loan. If you have a fixed-rate mortgage, your payments will be consistent through the length of your loan. But if you have a variable-rate mortgage, those payments may change. It’s good to build into your budget the highest that the payment could be in the future.
When you own a home, you’re subject to taxes levied by local governments. This money is used to support public schools, community safety, infrastructure and general services. Property taxes vary widely from state to state, county to county and even school district to school district. They also depend on your home’s value. You can use a property tax calculator to see a home’s potential tax burden. Some people pay property taxes directly to the government monthly, quarterly or annually. Others include them in their monthly mortgage payments.
4. Closing Costs
Perhaps one of the most overlooked factors in the home buying process are closing costs. They are a collection of fees charged by a mortgage lender and third-party service providers to document, secure and complete the financial transaction on a home sale. It’s the last thing you pay before you get the keys. Think credit report, title search, home appraisal and pest inspection. Altogether, they can come in at up to 5% of your home’s purchase price. Your lender will provide a Loan Estimate(previously known as a Good Faith Estimate or GFE) detailing what your costs are likely to be. It’s good to know that you can shop around for certain services to pay less in closing costs.
5. Homeowners Insurance
Most mortgage lenders require that you purchase homeowner’s insurance before they move forward with your application. These policies protect you against theft, fire, storms and other dangers. The average homeowner purchasing the most common type of insurance spends around $1,173 each year, but the amount you pay will depend on the age and quality of your home, the size and layout of your home, the location of your home and the value of your personal possessions. You can choose to pay your premium once a year or monthly along with your mortgage payments.
Shopping for your first home should be exciting, but it’s important to keep all of the financial aspects of home ownership in mind before you even begin. Get an understanding for current interest rates, standard closing costs, homeowners insurance policies and property taxes in the area where you want to settle. Then, take a close look at your own finances. Being realistic – and holistic – about what you can afford will yield the best home buying experience immediately and years into the future.
If you need help with the financial implications of buying a home, or any of your financial goals, you might want to talk to a financial advisor. An advisor can help you set and reach your goals. You can even pick one with specialized knowledge of taxes or real estate investing.