How You Can Prepare for the Costs of Homeownership

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

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:

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.

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.