In another installment of Financial Literacy Month, Talking Cents is covering the costs of buying a home. Since purchasing a home is one of the biggest investment you will make, it’s important to make sure that you understand all that comes with it. By saving and preparing for all related home buying costs, you will be less likely to encounter any unforeseen financial trouble, like too much credit card debt. Let’s take a look at some of the costs.
Costs of Buying a Home
Down Payment: This cost is generally 10-20% of the price you pay for the home. If you want to buy a house for $150,000, you will need a down payment of $15,000 to $30,000. There are first-time home buyers programs that require less than 5% down, but you will have to check your area and eligibility for those programs.
Closing Costs: Expect to pay 2-5% of the purchase price of the home in closing costs. These are charges from the lender and third parties. Sometimes, you can negotiate to have the seller pay a portion towards closing costs. The cost can include loan origination fees, attorney fees, inspection fees and much more.
Home Inspection: A home inspection is an important step to take although it is another cost to cover. Ranging anywhere from $300-$1,000, a home inspector will evaluate your home for issues related to plumbing, electrical, foundation and sometimes pests. This upfront cost can save you thousands of dollars if major issues are found before you sign on the dotted line.
Mortgage Payment: A mortgage payment includes the principal, interest, taxes and insurance. Make sure to use a mortgage calculator when estimating costs so it will be closer to reality than just breaking down the principal amount. This is a great way to avoid unexpected costs and debt.
Avoiding Debt When Purchasing a Home
Immediate Repairs: There may be unexpected repairs that need to be taken care of soon after you purchase your home. It’s important to have savings available just for this occasion. Start putting away a little every month to ensure you aren’t hit with a $2,000 repair bill with no money free to put towards it.
Budget: Ensuites, acreage, granite countertops all come at a premium whether you are renting or buying. Make sure your budget is reasonable and that you follow it! Don’t extend yourself and become house poor. This could spiral and create opportunities for credit card debt.
Bi-monthly Mortgage Payments: Depending on your interest rate, you may benefit from making bi-monthly mortgage payments. By sending in an extra payment dedicated toward the principal only, you will pay less in interest and pay off the mortgage in fewer years. The lower your interest rate, the less this strategy helps. Make sure to investigate your bank’s program; many suggest avoiding programs and simply sending it in yourself.
Research will be key in this process. Learning the in’s and out’s of mortgages, finding a first-time home buyer’s class and preparing a budget that accounts for saving and a mortgage will be crucial to keeping you away from too much debt. To learn more, visit ACCC’s Homeownership section.