By Mazen Fawaz
Learn more about Mazen on NerdWallet’s Ask an Advisor
Every for-sale home has a price tag, but there’s much more to the actual cost of a home, both when you buy and every month after. Before you sign on the dotted line, it’s important to keep in mind the hidden costs of homeownership. Here are a few of the most prominent — and pricey.
Mortgage payments
These monthly payments are the most predictable cost associated with buying a home. The one mistake many first-time buyers make is thinking that, like rent payments, the mortgage is the total sum they owe each month — as you’ll see below, that’s not the case.
Closing costs
When buying a home, your down payment is the big number that will make your head spin, but at least that becomes part of your equity. Closing costs, though, are another major figure that can catch many people by surprise, and it’s money that you don’t recoup.
Closing costs are lender and third-party fees paid at the close of a real estate transaction. For a $300,000 home, you can expect to pay $6,000 to $10,000 in closing costs. These costs can include one-time fees like the following:
• Appraisal fee: the professional estimate of the home’s value.
• Survey fee: the cost for verifying a home’s definitive property lines.
• Wire transfer fee: the charge to wire funds to purchase the home.
• Underwriting and origination fees: the charge associated with evaluating, verifying and processing the loan application.
• Document prep fee: the cost associated with prepping your loan documents for processing.
• Discount points: paid at the time of the deal to lower the interest rate on your mortgage.
• Credit report fee: the charge for pulling your credit history and scores.
• Title insurance: a must-get policy that protects you in case the seller doesn’t have full deed and authority to the property.
• Recording fees: government fees for recording new property records.
Real estate agent commission
Agent commissions are typically 6%, split 50-50 between the buyer’s agent and seller’s agent. Buyers don’t need to concern themselves with commissions, since they come out of the seller’s funds. Commissions are negotiable, so as a seller, it’s always worth asking for a lower commission before signing a listing agreement. For a $300,000 home, agent commissions will cost the seller about $18,000.
If you’re one of the many Americans who sell one home before buying another, know that about 6% of the sale price will go to the agents’ commission.
With the one-time transaction costs taken care off, homeowners still have ongoing costs, in addition to mortgage payments. Here are some of the main ones:
Property taxes
The tax man usually comes calling twice a year, but property tax laws and policies vary by state and county. Your real estate agent should be able to give you a rundown before you buy. Be aware that local governments can raise property taxes to cover municipal projects or expenses, so don’t assume that they’ll stay steady. Increases in the home’s assessed value, whether due to renovations or overall market conditions, also cause property taxes to rise.
Homeowners and hazard insurance
Just like taxes, these two types of insurance vary by state and region. Your homeowners insurance bill can be anywhere between $500 and $2,000 a year. Hazard insurance costs will also be determined by the risk factors in your area. In earthquake-prone California, you may have different costs than someone in Florida or Oklahoma. You can usually keep your costs lower if you bundle homeowners with your auto or life insurance policies.
Private mortgage insurance
If you don’t put down at least 20% of the purchase price, you’ll have to pay private mortgage insurance, which can be up to 1% of the loan amount annually. PMI protects the mortgage lender in the event you default on the loan. Many first-time homebuyers pay PMI; payments are made each month, lumped in with your loan payment, until the remaining principal balance on the mortgage dips below 80% of the home’s value. Your lender should automatically cancel PMI charges when you owe 78% of the principal or less, but until then, this is an extra cost to factor into your monthly budget.
Homeowners association, co-op or condo assessment fees
If you’re buying in a planned development with shared spaces, or a condo or co-op, you’ll have a monthly assessment on top of your mortgage payment that pays for improvements to the entire complex, such as landscaping or painting, or building-wide utilities such as electricity. In pricey urban areas, condo assessments can rival mortgage payments, so pay close attention to those costs before buying.
Utilities
This one usually shocks first-time homebuyers, especially those moving from apartments to single-family homes. Utilities can be $200 to $600 or more each month, depending on the size of the home. It takes a lot more energy to heat or cool a larger home, plus you’ll likely have to start picking up the bill for water and trash services. Ask your agent for an estimate on the monthly utilities before you buy to ensure you’re still within your budget.
It’s a serious financial endeavor to purchase a home and run a household. For the sake of your financial health, carefully consider the one-time costs and ongoing monthly maintenance before you head to the closing table.
Mazen Fawaz is the founder of OpenHouse, a real estate agent search company based in Santa Monica, California. OpenHouse is a NerdWallet business partner.
No comments:
Post a Comment