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Buying a House? Why Your Down Payment Isn't Enough

By Maurie Backman - Nov 29, 2015 at 11:40AM

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Consider your bubble burst.

You've worked. You've saved. You've scraped together enough for a down payment, and now it's your turn to get a piece of the good old American Dream in the form of your very own house. But before you bust out that bottle of celebratory champagne, be prepared to do a little extra number-crunching, because while your down payment is certainly a good start on the road to homeownership, there are other costs you'll need to account for as part of the process.

Making your down payment
Let's talk about that down payment for a second. Though you might get away with less, it's in your best interest to come up with 20% of your home's purchase price to avoid private mortgage insurance, or PMI. To minimize its risk, your lender will probably slap you with a PMI requirement if you fail to put down that sought-after 20%, in which case you could be looking at an extra 0.5% to 1% of your loan amount.

Say you take out a $200,000 loan and are hit with PMI at a cost of 1%. That's an extra $2,000 a year, or $166 per month on top of your regular mortgage payment. Plus, unlike regular mortgage interest, your PMI isn't even guaranteed to be tax-deductible. In other words, if you can come up with that 20% payment, you'll avoid what's essentially a penalty for not putting enough down. But even if you do manage to plunk down 20%, there are other up-front costs to consider.

Closing costs
There's a whole load of paperwork that goes into buying a house, and naturally, you'll pay for it. Your closing costs might include things like attorney fees, loan origination fees, recording fees, title fees, and survey fees. Is that enough fees for you? Closing costs typically encompass 2% to 5% of your home's purchase price. This means if you're buying a home for $220,000, you can expect to shell out anywhere from $4,400 to $11,000 in up-front fees. Now the good news is that your lender is required to provide a good faith estimate of what your closing costs will be so that you're not in total shock when those fees come in. The problem, however, is that your estimate can change by up to 10%, so you'd be wise to stash away a few extra thousand dollars to be on the safe side.

Prepaid escrow fees
Many lenders have a practice of escrowing money for real estate taxes and homeowners insurance. If your loan comes with an escrow provision, the upside is that your lender will make these scheduled payments for you so that you don't have to worry about them. The bad news is that since lenders generally aren't willing to take many chances, yours will likely require you to pad your escrow balance when you close on your loan. This could mean prepaying anywhere from two to six months or more of real estate taxes and homeowners insurance. Let's say your annual taxes and homeowners policy cost $6,000 and $1,000, respectively. If your lender requires a three-month deposit, you're looking at an additional $1,750 at closing.

On top of these costs, you'll need to think about things like home repairs and moving fees. Professional movers could cost several hundred to several thousand dollars depending on the amount of stuff you've got and the distance it needs to be hauled. Similarly, unless you're buying brand new construction, there's a good chance you'll need to tackle a few up-front repairs before settling into your home. While your home inspection should clue you in to the types of repairs you're looking at and their associated costs, you could be in for some surprises once you take ownership of your new abode. This is why it's crucial to set some funds aside to cover the unknowns of owning a house, many of which could rear their ugly heads from the get-go. So before you get ready to empty your savings account and convert that money into a down payment, make sure you've got enough cash on hand to cover the additional costs of buying a house. Otherwise that nice bottle of champagne may be the last one you'll crack open for quite some time.

 
 

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