Getting a mortgage has gotten a little easier in 2015, particularly for first-time homeowners. Thanks to new programs from Fannie Mae and Freddie Mac, buyers can get a conventional mortgage for as little as 3% down for first-timers and 5% down for everyone else.
While this definitely helps to lessen the burden of a large down payment, there are other costs you should be aware of before you decide to take the plunge into homeownership.
The term "closing costs" is a pretty broad term used to describe all of the expenses you'll have to pay before you close on your loan. According to Zillow, closing costs can include, but are not limited to these items:
- Credit report
- Closing/escrow fee
- Title search fee
- Survey fee
- Title insurance
- Prepaid insurance/taxes
- Attorney fees
- Transfer taxes
- Recording fees
- Processing fee
- Underwriting fee
- Loan discount points
- Pre-paid interest
Closing costs can vary widely depending on several factors but generally run about 3% of the home's value. Make sure you budget for this expense when deciding to buy a home.
This is something that most people are aware of, but many people are surprised at how much property taxes can vary from property to property. Since most mortgage estimators you find online use a set estimate for property taxes, it's best to do a little research so you know what to expect.
Property taxes depend on a variety of things, but the No. 1 factor that determines your property taxes is the location of your home. Some areas of the country have very modest property tax rates, and some are rather expensive. For example, in South Carolina you can expect to pay roughly $1,200 per year for an owner-occupied home worth $200,000. On the other hand, the same home in say, New Jersey could easily come with a $7,000 annual tax bill. That's a difference of nearly $500 per month on taxes alone.
Property insurance is another expense that can vary widely depending on several factors.
Virtually all homes with a mortgage are required to carry homeowners insurance, which protects you in the event of a fire, burglary, or similar disaster. Generally, this one is not too expensive, and a good estimate is about 0.5% of your home's value per year.
However, certain properties require special types of insurance, some of which can get expensive. For example, if your property is located in a coastal area, you may be required to obtain flood insurance, which can run well into the thousands per year for a modest amount of coverage.
Other types of insurance you may need are windstorm insurance (for hurricane-prone areas) or natural disaster insurance, and there are also several levels of basic homeowner's insurance you can buy depending on how many different "perils" you want covered.
If you put less than 20% down, you'll also have to pay for mortgage insurance, which isn't cheap. In the private market, mortgage insurance rates vary with your down payment and other qualifications, but FHA mortgage rates are a fixed 0.85% annual premium, as a percentage of the loan balance.
Maintenance is one thing new homeowners definitely aren't used to. When you rent, the landlord takes care of pretty much all of your maintenance issues. When you buy a house, it all becomes your responsibility.
And you may be surprised at how much it can add up. If you have a single-family home, you'll have to maintain your yard, get your gutters cleaned, paint your house occasionally, and arrange your own pest control. Also, don't forget that things break, and some may be rather urgent. For example, if your air conditioner breaks in the summer or your bathroom sink starts leaking all over the floor, these can be pretty expensive repairs that need to be dealt with quickly.
As a general rule of thumb, plan on spending between 1% and 3% of your home's value per year on maintenance expenses. If you have a newer home, you'll probably be on the lower end of this range, while older homes tend to have higher maintenance costs.
Just how much are we talking about here?
As the name implies, closing costs are due at the time you close on your loan, and they should run about 3% of your home's value. On a $300,000 home, you can expect to pay around $9,000 in closing costs.
Taxes and insurance are usually added onto the mortgage payment, and assuming a 1.5% annual combined rate (the standard that most mortgage calculators use), an owner of a $300,000 home could expect $375 per month added to the payment, and that figure could be much more in higher-tax areas. If you went the FHA route or put a low down payment on a conventional loan, expect another $200 or so per month in mortgage insurance.
Finally, maintenance is perhaps the scariest cost of homeownership because it's the most unpredictable. If your HVAC system dies or your roof reaches the end of its lifespan, the repair bills could easily stretch well into the five-figure range.
Now, I'm not trying to talk you out of buying a house. Instead, I want to make sure you know exactly what you're getting into when you do.