Many first-time buyers underestimate how much it really costs to buy (and maintain) a home.
We’ll take a closer look at a few expenses you’ll need to anticipate and save for when you buy your first home, so you’ll be ready when the time comes.
As a first-time home buyer, your largest expense will usually be your down payment. This is the first major payment you make toward your home purchase. Most lenders calculate your down payment as a percentage of your total loan value. For example, if you buy a $200,000 home and you want to put 10% down, you’d bring $20,000 to closing. Your down payment is due when you close on your loan.
Many first-time buyers believe they can’t buy a home unless they put 20% down. This isn’t a requirement – it’s possible to buy a home with as little as 3% down on a conventional loan. Some government-backed mortgages even have 0% down payment requirements. However, there are a few benefits to making a larger down payment:
- Avoid PMI. If you take out a conventional loan and you put less than 20% down, your lender will require you to buy private mortgage insurance. PMI is a type of insurance that protects your lender if you default on your loan. PMI is added to your monthly payment and affords you no benefits. If you have a 20% down payment, you can avoid paying PMI.
- Secure a lower interest rate. The less money you borrow, the less of a risk you are to your lender. If you have a higher down payment, your lender can offer you a lower interest rate.
- You can access a loan with a lower credit score. You might still be able to get a mortgage if you have a larger down payment. If you take out an FHA loan and you have at least 10% down, you can qualify with a score as low as 500 points. However, the minimum score at Rocket Mortgage®is 580.
- You can lower your monthly payment. Putting more money down lowers what you must pay your lender each month. Taking a little time to save more before you buy can make it easier to handle your mortgage in the coming years.
The bottom line? A large down payment isn’t a requirement to buy a home, but it can be helpful and allow you to unlock more mortgage options.
Closing costs are fees you pay to your lender in exchange for servicing your loan. They pay for things like your appraisal, title insurance and any inspections you must get before you close. The specific closing costs you’ll need to pay for will depend on where you live, your loan size and the type of loan you take out. Like your down payment, your closing costs are due when you close on your loan and take control of your property.
As a general rule, expect to pay 3% – 6% of your total loan value in closing costs. This means that if you take out a mortgage loan worth $200,000, you’ll typically pay $6,000 – $12,000 in closing costs. You can see an itemized list of every closing cost you need to pay for when you get your Closing Disclosure.
Maintenance And Repairs
When you rent an apartment and your HVAC system breaks down, your landlord is responsible for footing the repair bill. When you own your home, you need to cover all of the costs of repairs yourself.
Many homeowners underestimate just how much maintenance and repairs can cost. If you own a single-family home, you can expect to pay 1% – 3% of your home’s value in repair and maintenance costs. That can be $2,000 – $6,000 annually if you own a home worth $200,000. You might spend even more each year if your home is older or in need of repairs.
It can be a good idea to save an emergency fund before you think about buying a home. An emergency fund can help you cover costly repairs if an urgent situation arises. Your emergency fund should be separate from your down payment and in a place where you can access it quickly, like in a savings account. Covering repairs quickly can help you avoid long-term damage to your property. For example, if a pipe breaks, you’ll want to have cash on hand to call a plumber immediately.
Furniture And Appliances
Depending on the condition and size of your home, you may need to purchase everything from new blinds to new lighting fixtures. This can quickly become an expensive endeavor – for example, you might spend $1,000 or more on a new sofa.
There are a few ways you can reduce your furniture expenses. Try to move and reuse any furniture you already have to complete your home. When summer rolls around, you can often find furniture and small appliances at garage sales at a fraction of their retail prices. Online sale sites like eBay, LetGo and Craigslist have great deals year-round, as do local thrift or consignment stores. If you’re feeling especially handy, you can also breathe new life into old furniture pieces by DIYing them. For example, some sandpaper and a fresh coat of lacquer can make an old coffee table shine for less than $50.
You may also need to buy appliances for your new home. When you shop for a home, ask the previous owner what appliances the house comes with and which they’re taking along with them. You might be able to get a great deal on large appliances by offering to buy them from the seller when they move out.
Property Taxes And HOA Fees
You don’t pay property taxes when you rent a home or apartment. But you’ll need to plan ahead for taxes as soon as you become a homeowner.
Property taxes are paid to your local government. They pay for things like public schools, roads and fire departments. No matter where you live, you’ll pay some form of property tax. Most counties calculate your tax dues based on a percentage value of your home. If you live in a more expensive property or in an area with higher local tax rates, you’ll pay more.
Your mortgage company might hold your property taxes in an escrow account. An escrow account is a neutral third-party account that holds funds for a future purpose. Many mortgage companies add your property tax and homeowners insurance to your monthly payment. Then they move those funds to an escrow account until your taxes are due.
This method is beneficial for both you and your lender. You can pay your taxes in small increments throughout the year instead of worrying about a large single payment. Your lender gets the assurance that you won’t get a lien put on your house for failure to pay taxes. Your lender may not include escrow account contributions in your monthly payment, so you’ll need to anticipate your local taxes yourself and plan ahead for them.
You may also need to budget for homeowners association fees. These cover the cost of maintaining community common areas. The amount you’ll pay in HOA fees depends entirely on where you live. HOA fees can cost anywhere from a few hundred dollars a year to thousands of dollars a month, depending on your amenities. The average single-family homeowner pays $200 – $300 a month in HOA fees.
You may have paid a portion of your utilities when you rented a space. Your landlord might also have agreed to take care of a few monthly bills on your behalf. As a homeowner, you’ll need to cover 100% of the cost of heating, cooling and lighting up your home.
Home utility expenses can quickly turn into a much larger bill than most new homeowners expect. Homes are typically bigger than apartments, which means they can cost much more to heat and cool. The average homeowner in America spends about $270 a month on home utilities.
Before you move into your new space, it’s very important that you remember to transfer over all of your local utilities to your home. Research each of the utilities you need to pay and make sure that local utility companies know that you now live at the address. This will help ensure that you receive your bills on time and don’t accidentally miss a payment.
Buying and maintaining a home is more expensive than many first-time owners anticipate. First, you’ll need to save up a set percentage of your home value for a down payment. You don’t need a full 20% down to buy a home in most cases but having a larger down payment can give you access to more loan options. You’ll also need to save an additional 3% – 6% of your loan value to cover closing costs.
Closing on your loan is just the beginning. You’ll also need to cover the ongoing expenses that come along with maintaining your property. As a homeowner, you’ll need to pay property taxes to your local government. If your mortgage company doesn’t collect these payments in an escrow account throughout the year, you’ll need to save for them yourself. You may also need to pay HOA fees if you live in an area controlled by a homeowners association. Finally, don’t underestimate the costs of utilities and furniture. When you move into a larger space, these costs can significantly increase.
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