New homebuyers can see a property they like, consider its asking price, account for some negotiable wiggle room, weigh payments against present income, and, finding that it works, figure they’re okay to proceed. They err, however, in failing to consider all the costs associated with purchasing a home and living in it.
Home finances go well beyond the mortgage payment. And many outlays are up-front, meaning they can have an immediate financial impact.
For first-timers, this can be a wet-blanket realization for sure.
But approaching a real estate transaction with full awareness can increase the likelihood that new-home dreams come true.
A down payment is a percentage of the purchase price a buyer pays initially rather than over time (that’s the mortgage payment).
How much is a down payment? That depends.
In a conventional mortgage not secured by a government entity, a down payment’s components include the type of home, its price, and the loan product financing it.
Mortgages obtained with the help of governmental assistance, however (such as the Federal Housing Administration (FHA) or U.S. Veterans Affairs Department), can be less.
A home purchase transaction culminates in a process known as closing. It’s a meeting of all parties (or their proxies) related to the transfer of a deed.
Monies are exchanged, requirements checked, information verified, legalities addressed.
Those intricacies have related costs for borrowers, including charges for:
- Loan applications
- Borrower credit checks
- Origination and underwriting
- Title insurance
- Title searches
- Transfer taxes (as applicable)
In general closing costs comprise 2–5 percent of the intended borrowing amount (purchase price of the home, minus the down payment).
There is, however, a method to defer these costs. A no-closing mortgage option bundles purchase expenses into the loan’s principal or interest rate.
While it may represent a short-term benefit to the buyer, over the decades of the mortgage’s life, it may end up being the costlier option.
The government entity of the city, county, or borough in which the property is located will levy taxes on all native homes. The cost is added to the monthly mortgage payment as a simple line item, separate from interest and principal.
Property taxes are based on the current value of a home; therefore, they’re not fixed and should be budgeted accordingly.
Homeowners and Mortgage Insurance
A home usually represents the highest value purchase in an owner’s lifetime; therefore, it requires protection. Homeowners’ insurance guards the house against damage, theft, and vandalism. Rates can vary, and savvy buyers will shop around.
Private mortgage insurance (PMI) is a real-estate borrower expense that protects lenders against default. It generally kicks in for purchasers putting less than 20 percent down on their castle of choice.
Its requirement can swell a monthly mortgage payment 0.5–3 percentage points and can be ameliorated by increasing the down payment to 20 percent or more.
If that’s an impossibility, there is an upside to PMI: Its cost lowers as borrowers build equity, and there is a threshold below which it disappears altogether.
Condos, townhomes, and even singles clustered in a development may charge homeowner association fees. These monthly outlays cover things like landscaping upkeep and perks like onsite fitness centers.
A prudent buyer will ask what they are, what their collection frequency is, and what their rate of change has been (usually upward) over time.
For a personalized evaluation of the costs of buying and living in a first home, contact Penn Community Bank online.