Have you ever found yourself in the checkout line of Target watching your total slowly (or maybe rapidly?) inch its way up, and before you know it, you’ve spent $25, $50 or even $100+ more than you planned on? Take that and multiply it by 10 and that is what it can be like to purchase a home if you’re not familiar with the additional costs that accompany purchasing a home. Not to burst your home buying bubble, but while every spare dollar has been going toward your down payment fund, there are also some lesser-known out-of-pocket expenses that you should be aware of (and saving for).
1. Home Inspection
We list this first because it is that important, and as cliché as it sounds, knowledge is power. While not always required by lenders, it is a good idea to have a home inspection done to ensure you are aware of necessary repairs and potential safety concerns before closing on the home. Depending on suggested improvements or repairs, you can decide if you’d like to address those items in the contract or, if necessary, walk away. While many issues might be minor or inexpensive to repair, foundation, electrical and roofing issues might be a different story, and knowing what you’re in for is important in order to make an educated decision.
Estimate: $200 – $600
2. Closing Costs
Fees that you will pay at closing can vary, but typically include:
- Origination fee (processing fee charged by your lender),
- Title services (title search and insurance
- Credit report fee
- Government recording charges
- Survey fee (to verify property lines)
- Flood certification
- Appraisal fee (your lender wants to make sure the home is worth the amount you are borrowing).
These costs will vary depending on your location, but for example, an appraisal can cost anywhere from $250 to $600. Learn more about closing costs in this article from Bankrate.
Estimate: 2-5% of the home’s purchase price
3. Escrow Account
An escrow account is set up by the lender to pay your non-mortgage-related expenses, including the payment of property taxes, private mortgage insurance (aka “PMI” – a monthly premium you will pay if you put down less than 20%), homeowner’s insurance and any applicable HOA fees. Some lenders require you put money into the escrow account up front and will vary based on where you live and who you borrow from.
Tip: Lenders should provide you a Good Faith Estimate that includes a list of anticipated costs you can expect to pay as part of your home loan. Working with a reputable lender who provides you this information early in the home buying process will help you immensely when budgeting for anticipated expenses. Don’t forget to save for the move itself unless you’re lucky enough to have several strong and willing friends!
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