Beyond the Mortgage: What is the Real Cost of Buying a House?

If you’re preparing to buy a home, you’re probably thinking about money. You know you’ll need to qualify for a mortgage and make your monthly payments. What you may not know is the real cost of buying a house. What else do you need to worry about besides your mortgage payments?

At Addition Financial, we’re accustomed to working with first-time homebuyers to help them understand the true costs of homeownership. In this post, we’ll explain the other costs associated with buying a home, so you’ll be prepared.

Mortgage Application Fees

Most banks and lending institutions charge a processing fee when you apply for a mortgage. The fees are usually around $50 or $100 and they are meant to cover the processing costs for your application.

The institution you borrow from will need to run consumer credit reports on you and any other co-signers of the mortgage. A separate fee may be charged to pull your credit report. They’ll also spend time verifying employment, reviewing your tax returns and following up with you. The application fee covers these expenses.

Home Inspection Fees

Before you close on your new home, you’ll need to pay a professional home inspector to come out and inspect the property. This process benefits the buyer and you’ll need to pay for the inspection or else negotiate with the seller to cover the costs.

The inspection is meant to pinpoint any potential construction or safety issues with the house you’re buying. The cost is usually between $300 and $500, and in return you’ll get a written report detailing your new home’s condition.

If you decide to negotiate with the home’s seller, you’ll likely need to up the purchase price to do so. However, it’s important to make sure you hire a respected inspector and for most buyers, it’s easier to simply pay the fee and hire an inspector themselves.

Closing Costs

By far the largest non-mortgage costs associated with buying a house are the closing costs. They generally run between 2% and 3% of your purchase price and they may include some or all of the following:

• An appraisal fee (a professional estimate of the property’s value)
• A survey fee to verify the property lines
• Document prep fee (the cost of preparing your loan documents for the closing)
• Discount points, which are paid at the time of the closing to lower your interest rate and reduce the long-term cost of the loan
• Title insurance, which protects you in case the seller doesn’t have a full deed to the property you’re buying
• A wire transfer fee (charged by your lender to wire funds to purchase the house)
• Recording fees (government fees for filing new property records)

These fees must be paid at the time of your closing. It’s important to note here that as a buyer, you do not need to worry about the real estate agents’ fees. Those usually total about 6% of the purchase price but they’re covered by the seller.

Insurance Premiums

Every state requires homeowners to have insurance on their property to cover damage to the physical structure of the house. The requirements vary from state to state. For example, you'll likely pay more if you live in an area that experiences severe storms or earthquakes than you would if you lived someplace where you didn't have to worry about those things. Homeowners insurance is an ongoing, monthly cost, not something you'll pay up front; however, you'll need to have your policy in place before your loan closes.

Your lender may also require Private Mortgage Insurance, or PMI, if you make a down payment of less than 20% of the purchase price. PMI protects the lender from loss if you default on your mortgage. PMI premiums are typically built into the monthly mortgage payment. Also, keep in mind if you have an FHA mortgage, you'll need mortgage insurance as well.

Utilities

One thing first-time homebuyers don’t always realize is that paying utilities on a house is more expensive than paying them on a rental unit. Most homes are larger than apartments and the cost of heating or cooling them may invoke a bit of sticker shock.

You’ll also be responsible for covering water and trash services, which typically are not billed separately on rental properties. You can ask the current owners about their utility bills to get an idea of what you can expect to pay.

Property Taxes

When you rent a property, the property owner is responsible for property taxes. Of course, you’re paying for them in the sense that the owner will have accounted for taxes when calculating your rent, but there’s a big difference between paying a small amount monthly and being required to make a large, quarterly payment.

The property taxes are based on the value of your home. You should be able to calculate them in advance. Make sure to take the taxes into account before you buy a new home.

Buying a new home is a big decision. Understanding what costs are associated with applying for a mortgage, closing a sale and owning a home can help you prepare both financially and mentally for the challenges that lie ahead.

To learn more about Addition Financial’s mortgage options, please click here now.