So, you’ve been preapproved for a mortgage loan and you’ve begun shopping for your dream home. Congratulations! This is an exciting time, whether you’re a first-time home buyer or you’ve done this many times before.
There are a lot of things to consider financially when buying a home and it can be overwhelming. It’s important that you have a grasp on what exactly you will be expected to pay and what you can truly afford after insurance, taxes, and closing costs.
So, how much money will you need to come up with to buy a home? The actual figure depends on many factors. You may have to save more or less for the same home depending on current interest rates, whether you get a fixed or an adjustable rate mortgage, repayment terms, and your credit rating. Other expenditures you may want to save for are landscaping, immediate repairs, redecorating, furnishings (particularly if you are moving into a much larger space), and moving expenses.
Example for a $200,000 Home:
10% Down payment: $20,000
3.5% Closing costs: $7,000
2 Month reserve fund*: $3,300
Total estimated pre-purchase costs: $30,300
* $1,650 per month for Principal, Interest, Taxes, Insurance (PITI) and mortgage insurance. Example based on a 30-year fixed mortgage, 7% interest, $2,256 annual property tax, $600 annual homeowners insurance, and .65% mortgage insurance.
The Down Payment
The down payment will be the most significant outlay of your pre-purchase costs. The rule used to be that you needed to put down 20% of the purchase price, and you would obtain an 80% mortgage. Today, homebuyers can buy a home with as little as three to five percent down. If you do put less than 20% down, you will probably have to purchase private mortgage insurance, which will cost you between .5% to .85% of the loan amount until your equity reaches the full 20%. Keep in mind that the more you put down, the less your mortgage payment will be.
Earnest money is a cash deposit you make when you submit your offer, which proves to the seller that you are serious about wanting to buy the home. Your real estate broker will deposit the money into an escrow account, and if your offer is accepted, it will be applied towards the down payment. If the offer is rejected, it will be returned to you. Typically the earnest money deposit will be about two percent of the price of the home.
Closing costs include all fees required to execute the sale transaction, such as attorney fees, title insurance, appraisals, points, and tax escrows. Typically these fees are paid up front. The average cost is three to five percent of the purchase price.
Most lenders require that total housing costs not exceed 28% of gross monthly income, and total debt payments per month (including the mortgage) not surpass 36%. In real terms, this means that if you owe no consumer debt and have a household income of $75,000, then $1,750 in housing costs is within your range.
For most people, buying a home is both an exciting and challenging venture—it is the quintessential American dream. However, because of the high costs involved, saving for home purchase takes commitment, research, and sometimes sacrifice.
Our mortgage experts at Pen Air are prepared to guide you every step of the way. Visit penair.org/Mortgage to learn more.