Buying a house isn’t just buying a house, and buying a house isn’t cheap. While the downpayment is commonly the most substantial amount of what you’re paying when you buy a house, there are a number of other fees you will need to pay as well – either one time or ongoing throughout your ownership of the house.
What factors into costs of buying a house?
Let’s break this down into one time and ongoing costs. One time costs will include such things as your down payment, mortgage insurance, closing costs, moving, and new furniture. Ongoing costs will include such things as your mortgage payment, mortgage insurance, if necessary, HOA fees, utilities, and maintenance.
One time costs
These are costs you’ll only need to pay one time, some of which, like furniture and miscellaneous household items, you can put off for later, or you may already have all the furniture and tools you need.
A typical and recommended (for potential interest-lowering purposes) down payment with a conventional loan is 20% of the purchase price of the house. However, depending on the loan you get, there are ways to do far less than 20% with a government-insured loan but that will likely cost more for you to pay back in the long run. With a $300,000 home, a 20% downpayment is $60,000.
Banks, credit unions, and other major financial institutions typically offer two types of loans to home buyers: conventional and government-insured. The loan you choose will have a huge influence on what you put down and vice versa – what you’re able to put down will affect the loan type you’re able to choose.
Conventional loans are loans where the lender is not insured or backed by the federal government. These loans often have good interest rates but require bigger down payments than with government-insured loans.
Lenders often require borrowers to put at least 10 percent down to qualify for a conventional loan, and likely they will offer even better interest rates to buyers that put 20 percent down when buying a house.
Government-insured loans include FHA loans, VA loans and USDA loans. With these types of loans, the lender is insured by the federal government. This insurance is to protect the lender, who would normally be more concerned about default than with a conventional loan, since the buyer often has less of their own money involved in the loan.
- Federal Housing Administration (FHA) loans are open to most qualified borrowers, regardless of income, age or homeownership experience, and they require a minimum of 3.5% down. They are designed for low to moderate income borrowers with lower credit scores than conventional loans.
- Veteran’s Affairs (VA) loans are open to military service members, veterans and their families and require a minimum of 0% down. The VA loan program was originally created in 1944, part of the GI Bill of Rights for returning servicemen from WWII.
- US Department of Agriculture (USDA) loans are open to rural home buyers with income no higher than 115% of the adjusted area median income, which varies by county. These loans also require a minimum of 0% down. Uniquely, USDA Loans offer 100% financing to qualified buyers, and allow for all closing costs to be either paid for by the seller or financed into the loan.
Closing costs are lender and third-party fees paid at the close of all real estate transactions, split between buyers and sellers but typically paid mostly by the buyer. For a $300,000 home, buyers can expect to pay on average $9,000 to $12,000 (3% to 4%) in closing costs.
You’ll receive an official loan estimate from your lender that outlines these closing costs ahead of time, so there should be no surprises. With some closing costs, you have no choice but to use a certain service, however, you’ll have time to negotiate some of the costs and shop around for a better price on other closing costs.
Common closing costs include:
- Appraisal costs
- Home inspection
- Property tax
- Origination fee
- Title insurance
Can you avoid or reduce any of these closing costs?
Here are some possible ways.
Participate in a loyalty program
Some banks offer help with their closing costs for buyers if you use that bank to finance your purchase. It’s the bank’s way of offering a reward for being a customer.
Close at the end of the month
If you close at the beginning of the month, say March 6 (a month with 30 days), you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.
Get the seller to pay
Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing-cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller. However, don’t expect this to happen in hot markets where inventory is scarce.
Bake the closing costs into the loan
This could be a great way for you to go, if you’re trying to get a house without paying as much from the beginning or have no other choice. So the decision you need to make is, does the high interest rate on your mortgage payments in the long run on the loan justify not putting the cash down up front?
Check our blog How to Calculate Closing Costs for a more complete explanation on what you may need to pay and what additional ideas there are to help you reduce closing costs.
If you’re moving yourself, it will obviously cost you much less money than it would to use a mover,, however it will undoubtedly cost you much more time in packing and transporting. If you use a mover, know that movers charge more for longer distance moves and to transport heavy or bulky items like big furniture pieces, pianos, etc. Seasonal pricing also affects moving costs too, depending on when more people are moving more frequently – i.e. less people move in winter compared to summer, and so lower demand in winter will bring moving prices down.
If you have many things that need to be thrown away, you may need to pay for either a portable dumpster that can be picked up, or to have someone else haul those items away. And then on top of these things, you may need to pay deposits for electric, gas, water and trash collection at your new home.
Also, if you’re a previous homeowner, there’s typically a transition period between selling your current home and moving into a new one. If you’ve already closed on a new place before selling your current one, it’s possible that you’ll pay mortgages, utility costs, HOA fees, property taxes and homeowners insurance for two houses at once. For example, you should leave your utilities on while your house is on the market for showings and open houses. But shut them off the date you vacate the house, so you can avoid unnecessary payments. Your final utility bills for your current house should be prorated as of the date of sale.
If you haven’t closed on a new place, you’ll need to budget for temporary living arrangements. You’ll also need to pay to have your furniture and other belongings stored until you can settle permanently. And pay for moving a second time too. Transition costs from moving to home overlap typically add up to about 1-2% of the sale price, assuming a transition period of one month. On a home sales price of $300,000, that’s roughly $3,000-$6,000.
And when you move, you may need new furniture, such as a dining table, couches, bookshelves and beds, particularly if your new home is larger than your former home. You might also need new blinds or curtains. If the previous owner removed appliances or fixtures, you may need to purchase those too in addition to having professionals deliver and install those things. If your new home has a yard, you may need additional tools and items like a lawn mower, garden hose, etc. You may also need general tools for the do-it-yourself work on your house.
These are ongoing costs you’re going to pay again and again through your time at your new house. Of course, the cost of buying a home is only the beginning.
Once you’re comfortably settled in your new home, you’ll need to pay for ongoing costs related to homeownership. These include:
Your monthly mortgage payment is likely to be your biggest recurring cost as a homeowner, and this cost will vary depending on your loan size and interest.
Property taxes and homeowners insurance
You’ll typically have to prepay homeowners insurance and property taxes at closing, and you will pay for them on an ongoing basis as long as you own the home. The cost for these vary depending on your home value and location. If you have an escrow account set up, these charges are rolled up into your monthly mortgage payment. But if you don’t have an escrow account, you’re in charge of paying them on your own, and you may have the choice of paying them monthly or annually.
Conventional borrowers with less than 20% down are typically required to purchase Private Mortgage Insurance (PMI). This cost ranges between 0.55% and 2.25% of the original loan amount per year.
FHA and USDA borrowers with less than 20% down are also required to pay a Mortgage Insurance Premium (MIP) for the lifetime of the loan. This cost ranges between 0.25% to 0.60% of the original loan amount per year.
VA borrowers are not required to purchase mortgage insurance.
Many homes are located in neighborhoods/buildings that collect mandatory Homeowners Association (HOA) dues. These costs may vary depending on location, home size, and amenities offered. Be sure to check out how much these are per month before closing, as they can sometimes be significant. Cost: On average, $200 a month for properties requiring HOA payments.
Electricity, gas, water, sewer, internet and trash service can add up to a substantial amount every month too. Cost: On average for a 3 bedroom house, $200 a month.
Maintenance and Repairs
Every house will require ongoing maintenance and repairs. If you aren’t able to do it all yourself, and this is understandable, as many jobs require professionals, this could cost you $3,000-$4,000 a year.
How much money should you have saved to buy a house?
Begging the question asked above – after all this, how much money should you have saved to buy a house? Not including the down payment, the general rule of thumb is 10% of the purchase price of the house. So for a house with a $300,000 value, you should have $30,000 for closing one-time costs and to get you started with the ongoing costs.
Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor’s degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.