Financial Planning, Millennials

Upfront Costs Of Buying A Home

A common misconception first time home buyers have is that the downpayment is the only upfront expense they need to plan for. However, this could not be further from the truth. There’s a whole array of other costs other than the downpayment that you need to plan for.

Let’s take a look at each upfront expense you will have when you go through the home buying process so you can be better prepared.

1. Down Payment

You need to make a down payment in most situations when you buy a home. Most people think you need to put 20% down, but that is not true. Putting 20% down is more so about avoiding PMI (private mortgage insurance) than anything else (however in some places like NYC, you probably will not be able to secure a place without 20% down).

Putting 20% down will also help reduce your monthly payment since the total mortgage amount is lower. 

If you want, you can actually put down as little as 3% (even lower for people with certain jobs) with the average being about 6%. 

This means on a $500k house, the average person is putting down $30k. Picking the right amount depends on your unique situation. Work with your financial team on determining the correct amount for you! 

2. Closing Costs

Besides the down payment, you also have a bunch of costs to be paid on your closing date. This typically covers all the fees required to setup your mortgage like:

  • Mortgage application and underwriting fees 
  • Commissions paid
  • The home inspection
  • Home appraisal
  • Title 
  • Property recording and transfer taxes
  • Attorney Fees

This typically amounts to 2-5% of the loan. If you have a $500k loan, this could be $10k to $25k. This is something you need to plan for as that is not a small amount of money for most people. 

3. Prepaid Taxes and Insurance

You are typically expected to pay 1 year’s worth of homeowners insurance and at least 6 months of property taxes upfront. 

Depending on your state, this could be a large amount up front (especially if you live in a state like Florida). The average cost of homeowners insurance a year is $2,500 but could be a lot more when you have a larger house or you are in an area like Florida that has more risks associated with it (like hurricanes). 

Then for taxes, the goal is that you prepay the amount that is due to cover until the next due date.

Make sure to factor in this cost as it could be a lot!

4. Earnest Money/Good Faith Deposit 

This is a payment done usually within 3 days of your offer being accepted to show you are serious about the closing. It however, is not required and does not always happen.

When you make this payment, it does not go to the seller, it actually ends up counting towards your downpayment.  It typically amounts to about 1% of the purchase price, but can be more if needed to make your offer more serious. This can be important as sellers lose a lot of money the longer the house is on the market.

5. Moving/Furnishing Your New Place

Both of these are obviously more so a want than a need. However, that does not mean they do not need to planned for. It can get expensive to move, rent a truck, pay movers, ship things, etc. Plan for these costs ahead of time.

Additionally, as you move from an apartment to a house, you oftentimes need more furniture for other rooms. Map this out beforehand as furniture gets expensive quick!

The key here is to be aware of all the costs you have and plan for them! No one wants to go into credit card debt because of poor planning.

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