Estimating how much money you will require to buy a house is always daunting for homebuyers. Whether this is your first purchase or your second home, it is something that will give you worry and anxiety. But in 2023, it feels like a whole new level of frustration due to the rising home prices and surging mortgage rates. Despite everything, buying a home is a smart move and could help you lay a solid foundation for the future. Let’s take a look at the costs to budget for when buying a home.
1. Down payment
You must keep in mind that the purchase price of your home is not the only expense you incur. There is more to it. The first expense to account for is the down payment. It is the money you can afford to pay upfront toward the purchase of the home. When you make a higher down payment, the loan amount will decrease and your debt will be low. That said, lenders do like to see a higher down payment because it shows lower default risk. Do not believe the misconception that you need to put down at least 20 percent of the value of your home. You can make a lower down payment if you do not have the funds on hand and you will still be eligible for a mortgage. When it comes to figuring out the down payment, you need to think of your monthly budget. Do not spend every single penny you have towards the down payment, this way, you will use your emergency fund and stress yourself out. That said, the lender will also evaluate your finances and would like to see some cash reserves so that you can pay back the loan in time.
2. Closing costs
Besides the down payment, you also have to factor in the closing costs when you buy a home. You will have to pay about 2 to 5 percent of the loan principal as your closing cost. However, the actual amount will vary based on where you are buying a home. It includes a credit report fee, origination fee, appraisal fee, underwriting fee, application fee, title insurance, and title search fee. The fees will vary from one lender to another which is why it helps to have an idea about the same so that you can save whenever possible. You need to keep in mind that you could pay an additional expense on the closing day which is not just closing costs. It is known as prepaid and includes the property taxes as well as the premium on your home insurance.
3. Mortgage Payment
Once you are approved for a mortgage, you will have to make monthly payments to repay the loan. It is a very predictable cost and something you can budget for. Simply use a mortgage calculator to get a quick estimate of the amount you owe every month. If your down payment is below 20 percent of the value of your home, you will have to buy mortgage insurance and it can be paid upfront or added to the monthly mortgage payment.
4. Homeowners Insurance
This is a long-term cost you must include when budgeting for your new home. Home insurance will protect your home from the perils listed in the contract. You have to make a monthly or annual payment in the form of premiums. Besides home insurance, you might also want to consider a home warranty. According to the experts at Cinch Home Services, “the home warranty rates will vary based on your location while Ohio home warranty plans range anywhere between $25 per month to $80 per month, based on the type of coverage you choose”.
5. Home maintenance
While this might not be an upfront cost, it is something you should budget for if you want to own a property. Your home will require repair and maintenance from time to time and if you do not set aside a certain amount for the same, you could end up paying hundreds or thousands of dollars for the maintenance of your property. Every month, try to set aside a certain sum for the maintenance of your home and if you do not need it this month, you will need it in the future. Start saving up for it whenever you can.
Owning a home is a matter of pride and for a lot of first-time buyers, it is the biggest investment they make in their life. This is why it is important to consider all the costs associated with the process of purchasing your home and start budgeting for it at the earliest. If your finances are in place, it will become easier for you to get the lender’s approval.