The different costs that go into buying a home
Quick insights
- Purchasing a home may require budgeting 10-15% more than the down payment and purchase price of the home.
- Any extra budget you can save up for the purchase can cover closing costs, fees or other associated expenses.
- HOA dues, moving expenses and home maintenance may also have an impact on your overall budget.
Purchasing a home is one of the biggest financial decisions you could make in your life. For first-time homebuyers, the list of fees may look long and, at first glance, a little intimidating. But once you break down the costs associated with buying a home, the picture starts to make a lot more sense. Think of it this way: the sticker price of the home is only part of the story. The rest comes from closing costs, the down payment and a handful of other related fees that keep the deal moving from “dream house” to “house keys in your hand.”
Let’s break down the most common costs of buying a home, so you know which might show up on your homebuying journey from offer to closing.
Costs associated with buying a home
When you’re searching for a home and mapping out your budget, here are the main costs:
- Down payment: This is your upfront money put toward the home’s purchase price. Depending on the type of loan you apply for, your down payment may range from 3-20% of the purchase price. For example, 20% down is usually required to avoid private mortgage insurance (PMI) on conventional mortgages.
- Earnest money deposit: Think of earnest money deposit as your “I’m serious” handshake to the seller. It’s typically 1-3% of the home price and is later applied toward your down payment or closing costs.
- Home inspection and appraisal fees: Home inspections could run anywhere between $300-600 depending on the property, while appraisals may fall in the $400-700 range. Both the inspection and appraisal give you (and your loan provider) confidence in the home’s condition and value.
- Moving expenses: Don’t forget the cost of getting in the door. Whether you hire professional movers or rent a truck, moving fees could range from a few hundred dollars for a local move to several thousand for long-distance.
Closing costs and lender fees
At the end of the homebuying process, you will need to pay closing costs, which usually range from 2% to 5% of the home’s purchase price. Closing costs typically include:
- Loan origination and underwriting fees: Mortgage providers might charge these fees for processing and approving your home loan.
- Title search and title insurance: Protects both you and your lender from potential disputes over ownership.
- Recording fees and transfer taxes: Counties and states may charge these to officially record the deed.
- Prepaid items: This could include property taxes, homeowners insurance and a few months of mortgage interest collected upfront.
- Discount points: Discount points are optional upfront payments to potentially lower your mortgage interest rate. One point generally costs 1% of the loan amount and can lower the interest rate by a certain amount.
Ongoing costs of owning a home
Once you move in, your budget will still need to cover the costs of a house beyond your monthly mortgage payment:
- Principal and interest payments: Your monthly mortgage payment depends on your loan amount, mortgage interest rate and loan term. Many first-time homebuyers choose a 30-year fixed-rate mortgage to keep the payments predictable over the life of the loan. Others might consider an adjustable-rate mortgage (ARM), which generally starts with a lower rate that could change after an initial fixed period.
- Property taxes: Property taxes vary by state and county but could range from 0.5-2% of your home’s value each year. On a $400,000 mortgage, that might mean $2,000-8,000 annually.
- Homeowner’s insurance: Premiums usually depend on the location, coverage and condition of the home, as well as the insurance provider. These variables could translate to a policy that costs hundreds or thousands each year.
- Maintenance and repairs: A general practice may be saving 1-3% of a home’s value annually for maintenance or repairs. On a $400,000 home, that’s $4,000-12,000 each year that may help cover upkeep and surprises.
- Homeowners association (HOA) fees: If your home is in a managed community or condo building, you may need to pay monthly HOA dues, which could range depending on amenities, location and services.
How mortgage rates impact the cost of a house
Mortgage rates play a critical role in the overall costs of buying a home, often influencing what a homebuyer can comfortably afford each month. Even a small change in mortgage rates could mean a difference of hundreds of dollars in your monthly payment and tens of thousands over the life of a loan. Important factors that may affect the interest rate you receive are typically your credit score, loan type, down payment and broader economic conditions. For instance, a 30-year fixed-rate mortgage keeps your payment predictable for the long term, while an ARM might start lower but could rise over time.
Because interest rates shift daily and vary between loan providers, many first-time homebuyers have a lot to consider. They can compare their options, take into account discount points and explore mortgage preapproval early on to understand how their rate could impact the total cost of buying a home.
Example of buying a home that costs $400,000
To give you an idea of what fees are typically associated with buying a house, take a look at the example below. Keep in mind, these numbers are only illustrative, actual expenses may vary by location, loan provider and personal financial situation, among other factors.
For a $400,000 mortgage loan:
- Down payment (10%): $40,000 (could be higher or lower depending on the loan program)
- Earnest money deposit: $4,000 (usually applied toward down payment or closing costs)
- Loan origination fee (1%): $4,000 (charged by loan provider to process the loan)
- Underwriting fee: $750 (covers loan provider’s review of your application)
- Home inspection fee: $500 (may vary depending on home size and location)
- Appraisal fee: $600 (required by mortgage lenders to confirm property value)
- Title search and insurance: $1,200 (protects against potential ownership disputes)
- Transfer tax: $2,000 (may vary by state or county)
- Recording fees: $150 (charged to record property deed)
- Prepaid homeowners insurance: $1,200 (first year often paid upfront)
- Prepaid property taxes: $3,000 (collected at closing)
- Prepaid interest: $600 (covers interest from closing date to first payment)
- Reserved 2 months’ mortgage payments: approx. $5,200 (set aside for escrow reserves)
Estimated total costs: $62,200
In summary
For a first-time homebuyer, the costs associated with buying a home may feel like a long list, but knowing what to expect can help you prepare for the journey. Between the down payment, closings costs and ongoing expenses, it may be helpful to budget more than just the purchase price of the home. Remember, key factors such as mortgage preapproval (mortgage application process), credit score and discount points may influence what you pay over time.
While exact numbers will vary, being aware of these homebuying fees and working with a Home Lending Advisor can give you the confidence to move forward wisely.
