Buying a home is exciting, but it is also expensive thanks to a myriad of variable costs. However, regardless of loan products or selected extras, there are eight common costs you can count on when you are ready to buy.
1. Down payment
Down payments average 3 to 20 percent of the purchase price, depending on the loan. For example, if you purchase a $300,000 house and have a 10 percent required down payment, your out of pocket is $30,000.
2. Prepaid property taxes
You are responsible for paying property taxes from the date of closing through the end of the year. For example, if the property taxes on a house were $3,000 a year and you purchased the house on September 1, you are responsible for paying taxes from September 1 to December 31 of that year, which (using the above model) would be $750.
3. Prepaid interest
You are also responsible for paying interest on your loan from the date of closing through the end of the month. The amount varies based on your interest rate, but the later in the month you close, the less you pay. For example, if you close on September 28, you pay two days’ worth of interest. If you close on September 1, you pay 30 days’ worth of interest.
4. Homeowner insurance premium
You need to pay one full year of your homeowner’s insurance premium at closing. Your amount is based on the policy and coverage you chose prior to your closing date. The average annual policy premium ranges from $400 to $1,200.
5. Closing costs
Closing costs are comprised of your loan origination fee – typically one percent of the loan amount – and your escrow fees, including title insurance. This varies considerably based on your lender and title company, but usually account for one to two percent of the loan amount.
6. Mortgage insurance (PMI)
On Federal Housing Administration (FHA) and conventional loans with down payments of less than 20 percent, borrowers pay 1.5 percent of the loan amount at closing and then 0.5 percent of the loan amount monthly until they reach 20 percent equity in the property. This is more widely known as mortgage insurance; a fee paid to the lender in the event the borrower defaults.
Borrowers that want to buy down their interest rate will pay points. Points start at $1,000 for a fraction of a percentage point with most loans; however, the savings can be worth it.
Appraisal fees range from $300 to $500, depending on the size and sales price of a home. This fee is usually paid before closing.
Your prepaid items and closing costs typically amount to three to four percent of your sales price. On a $300,000 home, a borrower should expect to pay $9,000 to $12,000 in closing costs and fees, in addition to his down payment. Sellers can contribute up to four percent of the closing costs as part of a real estate contract, but cannot contribute toward the down payment. Ultimately, the closing costs and fees borrowers end up paying are dictated by local market conditions and by the creditworthiness of the borrower.