Purchasing a home is a very large investment that can seem extremely overwhelming when you add all of the time, effort and money that go into the transaction. In addition to committing yourself to mortgage payments for either 15 or 30 years, you will need quite a bit of money saved “up-front” to close the transaction. There are several types of “up-front” costs you should be prepared to pay when it comes to buying a home.
Some of the biggest fees associated with buying a home are the closing costs. According to Investopedia, closing costs are defined as the expenses, over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Also known as “settlement costs.”
Closing costs usually vary between 1.5-2% of the purchase price of the home. Although it is typical for the buyer to pay the closing costs, if you’re short on cash for the closing costs and can’t roll the closing costs into the mortgage, you can always consider asking the seller if they’re willing to pay part of the closing costs. It’s not unusual for buyers to ask for this. Just think- the worst that can happen is that they say no.
Example: If you are buying a $400,000 home, financing it over 30 years at a 4% mortgage rate and put 10% ($40,000) down, total estimated closing costs = $5,829.
This closing cost calculator can help you estimate roughly how much you will need to have saved.
Another large chunk of expenses that go into the cost of buying a home are the pre-paid expenses. Pre-Paid expenses consist of the Prorated Tax Amount, Homeowners Insurance and Pre-Paid Interest. This amount is usually 1.5-2% of the purchase price of the home. Consider shopping around for Homeowners Insurance, as you can get quotes that vary between a few thousand dollars.
Example: If you are buying a $400,000 home, financing it over 30 years at a 4% mortgage rate and put 10%($40,000) down, total estimated pre-paid expenses = $7,087.35
Summary: If you’re planning on buying a $400,000 home you should expect to pay around $52,916.35 when all is said and done.
Down payment ($40,000) + Closing Costs ($5,829) + Pre-Paid Expenses ($7,087.35) = $52,916.35