Buying a home can be one of the most exciting, yet nerve-wracking, purchases you will ever make. For most of us, this purchase is the single largest purchase you will ever make. And the whole process around house hunting is not an easy one either. You are potentially looking at several months or more of house tours, realtors, and negotiations, something that definitely has scope to be exciting but has an equal chance of being a bit stressful, if only because of the drawn-out process of actually closing the deal on a home purchase.
Once you decide on the home you love you’re going to want to move in right away. But, unfortunately, it’s not that easy. There are several processes that must be undertaken, as well as costs that you should be aware of, that go much more beyond the list price of the home. And these costs should be well-understood before you sign any contracts.
1. The Down Payment
Let’s say that after negotiations, potential bidding wars, and hours spent biting your nails, hoping for good news, you get a call from your realtor that the owner of the home you fell in love with has accepted your offer. For argument’s sake, let’s say that the offer was for $500,000. Fortunately for you, this is not the amount of cash that you have to cough up. The first payment you will be making is called a Down Payment. A down payment is simply an initial payment at the time the transaction is first made. Down payments are the truth of life with credit; they are used when buying a car, leasing a car, renting an apartment, renting a home, etc. etc. Odds are high that, at some point, you have encountered a down payment before.
The biggest difference between a down payment on a home and these other types of down payments will be in the amount. Generally, the down payment that you will have to pay to secure your purchase of the home will range from somewhere between five and twenty percent of the home’s value. In this instance, the range would be somewhere between $25,000 and $100,000. This is an important cost to keep in mind, as, although you won’t have to pay the full amount in the list price, you could still have to pay a very significant amount. This is largely why securing and reaffirming your budget before you start the house-hunting process is so important.
You have to look at what you have saved up, as well as your annual expected income, to find out if you can afford the down payment, as well as the mortgage, which will become a monthly expense once you own the home. And that brings us to number two.
2. Mortgage Payment
A mortgage is simply a type of loan in which a bank lends the borrower money, which will be paid back over a long period of time with interest. The amount you’ll be paying each month will depend on a couple of factors – the amount of your initial down payment, the value of the home, the term of the loan (how many years), and the interest rate the bank agrees to grant you. The better your credit, the lower your interest rate. The longer the life of the loan, the smaller your monthly payments.
Additionally, if you can afford to pay a larger down payment, your monthly mortgage payments will be smaller, because the principle of the loan would be smaller. For instance, on that $500,000 house, if you put down an initial cash payment of $100,000, the principle of your mortgage would only be $400,000; the more you can put up in a down payment, the less you’ll have to pay over time. The mortgage types you can use are fixed-rate or variable-rate mortgages. As the titles imply, fixed-rate mortgages won’t change during the length of your mortgage, which could be 15 or 30 years, while variable-rate mortgages are subject to change during the term of the loan.
3. Costs to Close
Even after you pay your down payment, you’re still not out of the woods. There is a large variety of fees that go hand-in-hand with closing on a home. The fees you will pay will cover things like pest inspections, home inspections, home appraisals, credit reports, and title searches, among others, which can cumulatively add up to in the region of five percent of the purchase price of your home. Back to that $500,000 example, the costs you’re looking at could be around $25,000, a relatively significant figure, and one that should definitely be factored into your budget.
Insurance is one of those unavoidable costs of living. There is a myriad of types of insurance, including life insurance, car insurance, and homeowners insurance. If you have a mortgage, chances are the lender will require that you purchase home insurance. And even if they don’t, it’s still a good idea. It’s better to be insured and not need it, than not be insured, and find out that you do need it. The amount you’ll pay, in either a monthly or annual premium, will depend on the value, location, size, and age of your home, as well as the value of your other possessions. This could potentially add anywhere from a few hundred to several thousand dollars to your monthly expenses, another thing to factor into your budget before you purchase a home.
Remember that expression that says that the only thing certain in life is death and taxed? When it comes to that property you are intending to buy you should be aware of the fact that in addition to all those aforementioned costs, you will also be paying monthly taxes to either or both your state and federal government, once you become a homeowner. The tax you will pay will largely be dependent on the value of your home and, by and large, the exact state the property is located, and these taxes go towards supporting various government expenditure like spending on public schools, the police department, and building fand maintenance of local infrastructure.
Buying a home should be exciting, and it is. These are just costs to keep in mind when creating your budget; if you account and prepare properly for these costs beforehand, you’ll end up preventing a lot of stress down the line. And if this does seem like a lot to keep in mind, you might benefit from hiring a real estate lawyer to keep everything in order for you and advise you along the process..