Buying a home is an exciting time and a big milestone. Home ownership comes with a lot of freedom and benefits compared to renting, but with that freedom comes some added financial responsibilities, too. Below are some important costs to keep in mind before you close on your dream home.
When a homebuyer is shopping for a house, the annual percentage rate, or APR, gives them an overall idea of how much they’ll end up paying for the loan they choose. Unlike the interest that you owe, you don’t pay APR to your lender each month. The APR is more of a measurement that helps buyers compare mortgage options. It is stated as a yearly rate, and it includes your interest rate and other fees.
For example, let’s say you’ve found a house you want to buy. You go to two different lenders to compare mortgages. The first lender offers you a 3% mortgage rate with a 4.5% APR. Since the mortgage rate is included in that APR percentage that means the additional 1.5% tacked on is what you’ll pay in fees. The second lender offers you a 3% mortgage and a 5% APR. In that case, you’d be paying the same mortgage rate that you were offered by the first lender, but the second lender charges more in fees than the first one, at 2%. In this case, the first lender would probably more appealing to you since you’d be paying less.
Don’t forget that in addition to the down payment and mortgage you’ll be paying, you will need to budget for closing costs, which you’ll have to pay up front. They’re part of those fees we mentioned earlier about APR. Closing costs may include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing is typically about three percent to six percent of the mortgage amount. You will receive an official Closing Disclosure form three days before closing that will clearly define the cash you will need to close.
Private Mortgage Insurance (PMI)
Most borrowers are required to have private mortgage insurance, or PMI, unless they’re able to make a down payment of at least 20%. PMI helps protect the lender in case a borrower defaults on his or her loan. An initial premium payment of 1% to 5% of your mortgage amount is usually required. Depending on the borrower’s loan structure, PMI may include an additional monthly fee. In some cases where a borrower’s down payment is less than 20%, the lender won’t require PMI, but the borrower will end up paying a higher interest rate on their mortgage instead. PMI is usually no longer required once there is at least 20% equity built in a home.
For many homeowners, property taxes are the second biggest expense after mortgages. How much you pay in property taxes depends on where you live. Residents in New Jersey, Illinois, and New Hampshire pay some of the highest property taxes in the country, while Hawaii, Alabama and Louisiana pay some of the lowest. Make sure to do your research on how much you can expect to pay for property taxes in your area. Working with a local licensed assessor and tax advisor can help you calculate this.
Some lenders require homebuyers to have what is called an escrow account. Escrow accounts are set up by a mortgage servicer to collect money on a monthly basis to pay property taxes and PMI. The mortgage servicer will keep track of the principal and interest paid, collect and process payments and manage the escrow account.
Repair and Maintenance Costs
Once you a buy a house, you’ll be footing the bill for any kind of upkeep costs. No matter how new a house is, you never know when an appliance might go haywire, a faucet may start leaking or a roof may become compromised. Depending on whether or not you hire professional help, some of these jobs can be costly to fix. The good news is that you can be prepared for these unexpected costs by planning ahead and setting aside money each month for a maintenance fund. Additionally, with certain repairs and upgrades, the value of your house increases.
While there are some costs that come with owning house, homeownership provides financial stability and tax benefits, and it’s an investment. With interest rates unusually low and rental rates soaring, now is a great time to buy.
At PrimeLending, we make home loans simple. We’re committed to helping you find the right home loan product for your budget. Our friendly, knowledgeable loan officers are here to help guide you through the entire process. Get in touch with us today to get started.