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How You Can Prepare for the Costs of Homeownership

Understanding the true cost of homeownership can be confusing, especially when the real price of owning property is often unclear or feels hidden. Costs can vary, so it’s important to know how much to budget for closing costs and other expenses that may arise.

Understand costs during the purchase and closing processes

Here’s a breakdown of potential costs associated with the process of making an offer and purchasing a home.

An earnest money deposit is a sum of money that a buyer provides along with the offer to show how serious they are about buying the home. Typically, earnest money deposits are between 1% and 3% of the price of the home. They are held in a temporary escrow account and then either applied toward the closing costs or down payment at closing. If you back out of the sale, you may lose this deposit, depending on the terms in your sales contract.

The down payment is the initial amount a homeowner must pay for their property. It's typically a percentage of the home's purchase price. The down payment is due at your home loan closing and can be one of the biggest perceived financial barriers for hopeful homeowners. Although a 20% down payment can help borrowers avoid private mortgage insurance (PMI) on conventional loans, there are programs that allow down payments as low as 3%. A wide variety of financing options and programs are available, many geared toward low- and moderate-income borrowers.

Learn more about down payment assistance programs that might be available to you.

If a homebuyer makes a down payment of less than 20%, the lender may require private mortgage insurance (PMI) for a conventional loan. This coverage protects the lender if there is a default on the loan. The cost for this insurance can be paid in full at closing or monthly. Once 20% equity in the property has been reached, you have the right to request to cancel PMI.

Closing costs are the different fees and expenses associated with processing and finalizing your home loan. Recording fees, an appraisal, mortgage insurance, property taxes, and homeowners insurance are some of the fees that may apply.

There are typically three types of costs to expect at closing:

  • Lender fees: Origination, application, processing, and underwriting fees and discount points
  • Third-party fees: Title search fees, title insurance, attorney fees, recording fees, and tax certification; in some cases, appraisal and inspection fees are listed on the closing disclosure as paid, however those funds are spent at the time of service.
    • Appraisal fee: Your mortgage lender will most likely require a home appraisal, which is intended to provide an unbiased estimate of the property’s fair market value.
    • Inspection fee: A home inspection examines the physical condition of the house to bring existing (and sometimes potential) issues to your attention before closing. During an inspection, you may uncover issues with the home — giving you the ability to renegotiate the selling price or have the seller fix the problem.
  • Miscellaneous fees: Private mortgage insurance and/or an escrow account

Let's say you've found a home and have been approved for a mortgage, but these up-front costs seem overwhelming. You may consider exploring one or more of these sources to help you come up with the money:

  • A gift from your family. This can include anyone you're related to by blood, marriage, adoption, or legal guardianship. It also might include spouses, fiancés, domestic partners, children, and other dependents. You’ll want to work with your lender to verify if your loan type accepts gifts to cover fees.
  • A grant from a business or nonprofit. This could be from your church or employer(s), municipalities, nonprofit organizations, or public agencies. If you're a member of a Native American tribe, it can contribute as well. Your lender might be able to help you identify other resources.
  • A small loan. Some organizations can provide additional, smaller loans to help cover down payment and closing costs. These can have several flexible options, including loans that defer payments (allowing you to pay them later) or even some that are forgivable (meaning you won't have to pay the money back if you meet specific requirements). You'll want to work with your lender to find the best fit for you and to better understand how programs differ.

Figuring out the costs of homeownership after closing

When buying a home, it’s important to plan for more than just the down payment and closing fees. Here are some factors homeowners need to consider when calculating their homeownership costs.

Your monthly payment covers a number of things, including principle, loan interest, and the lender escrow deposit (the funds set aside to pay for property taxes and/or insurance fees), if one was established. The cost structure of your monthly payment is referred to with the acronym PITI:

Principal: The amount you borrowed

Interest: The amount the lender charges you to borrow

Taxes: The amount you pay in property taxes to your local city/municipality

Insurance: The amount you pay to insure your home from damages, as well as private mortgage insurance costs (if necessary)

Your monthly payment might also include the fees paid to a homeowners association (HOA) on your property.

If you are utilizing an escrow account, a portion of the monthly mortgage payment goes into the account so that your mortgage company can make property tax and/or insurance payments on your behalf.

Understanding escrow accounts

Some lenders will require an escrow account. This is an account in which funds are held by a mortgage servicer to pay for certain property-related expenses. After closing, a portion of the monthly mortgage payment goes into the escrow account so that the mortgage servicer can make property tax and insurance payments on the borrower’s behalf.

Why is this helpful to first-time buyers and buyers without significant savings? It allows homeowners to set aside a small monthly amount instead of having to plan for a large semi-annual or annual expense. However, it’s important to note that it will have an impact on your monthly mortgage payment and should be accounted for in any budgeting or planning.

Moving comes with a cost, and often it’s one people forget to include in their budget. Fees vary based on a number of circumstances, such as distance, truck size, season, accessibility, etc.

From electricity and water to heating and Wi-Fi, your home wouldn’t be home without working utilities. Prices vary based on location and your home’s size. Researching prices in your area could help you better prepare for these monthly expenses.

As a homeowner, you’ll be responsible for any unexpected expenses, such as a broken heating, ventilation, and air conditioning (HVAC) system or a malfunctioning appliance. So, it’s important to build up cash reserves — funds that you can access quickly to cover your mortgage payment and other housing-related expenses — before you start the homebuying process. Saving between three and six months’ worth of essential expenses in a “rainy day fund” can help prepare you for unexpected costs or situations like a loss of employment or large medical expenses.

Depending on the type of home you purchase or the neighborhood you buy in, you may need to pay a homeowners association (HOA) fee or a condo fee. HOAs are common if you buy a condominium, townhouse, or single-family home in a planned community. Some neighborhoods have monthly or annual HOA fees collected by an HOA that are used for things like ground maintenance, community facilities, and lawn and garden care. Be sure to research and account for these fees when planning your new home budget.

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