It’s true that when it comes to buying a home, there’s usually more to it than meets the eye. But if you know what to look for upfront, you can shop with confidence knowing you’ve got every expense covered.
There are a number of factors that will affect the total cost of your mortgage and ultimately how much you’ll pay each month.
Rates can vary significantly by lender, so be sure to look at all your options. Even a 1 percent change can make a difference of hundreds or more each month. For example, consider a $200,000 home with a 10 percent ($20,000) down payment: $180,000 financed over 30 years at 4 percent would set you back $859 per month; at 5 percent it would mean $966 per month. That’s a difference of $107 per month, or $1,284 per year.
Some lenders charge upfront fees called “points” with their mortgages, which can range from a few hundred to thousands of dollars. A point equals 1 percent of the total loan amount. Points can increase your closing costs — or your monthly payment if they’re rolled into the loan. Often paying more points can get you a lower mortgage interest rate.
PRIVATE MORTGAGE INSURANCE
Most lenders require private mortgage insurance, or “PMI,” if your down payment is less than 20 percent. This can add hundreds of dollars a year or more to your mortgage payment.
As most new homeowners quickly learn, new costs can creep in even after the home is purchased. Appliances and furniture can add thousands of dollars in expenses.
Property taxes vary widely depending on where you live. Many lenders will collect them as part of the monthly payment and deposit the funds in an escrow account. If so, it can add a few hundred or more to your monthly payment.
If you’ve calculated a monthly payment without considering these costs, you may be in for a surprise when the dust settles. Continuing with the example from above using a 4 percent interest rate, we’ve added average points, PMI and property tax:
$180,000 financed over 30 years at 4 percent: $859 per month
$1,800 points ($180,000 x .01) rolled into loan: $5 per month
$125 PMI: $125 per month
$250 property tax ($200,000 x .15): $250 per month
Total Monthly Payment: $1,239 per month
Having a home inspected before you make an offer is a smart way to avoid costly problems down the road. Many lenders also require an inspection as a condition of the loan.
A home inspector will look at the home from top to bottom, providing a detailed condition report. Depending on the size of the structure, an inspection can range from $200 to $470, according to Home Advisor.
Based on the home’s location, a radon test or mold test may also be required. Radon testing runs about $165 and mold testing can be from $300 to $500.
If a bank is lending you the money to buy the home, you’ll be required to insure it. And even if you’re not borrowing, having homeowner’s insurance is still highly recommended, as it can protect your investment from a variety of threats.
Since there are so many variables that can impact the cost of homeowner’s insurance, it’s wise to consult carriers in your region who can provide an accurate estimate. Living in a flood plain, hurricane or tornado area, or region known for earthquakes can require you to carry additional coverage.
GIVENS AND SURPRISES
As most new homeowners quickly learn, new costs can creep in even after the home is purchased. Appliances and furniture can add thousands of dollars in expenses. Renovations and landscaping can also add tens of thousands to your bottom line, as well as unexpected costs, like a garage door that breaks down or a furnace that gives up in the middle of winter.
It’s a good idea to budget a monthly amount to save for planned upgrades and another amount for unplanned ones.
THE BOTTOM LINE
While the bottom line to home buying is more than the list price, preparing for it beforehand can lead to a happy and financially healthy experience. And that’s the bottom line by which most home purchases are measured.