Buying a house isn't as simple as just getting a loan. There some expenses involved. There are generally two types costs involved when buying a home: upfront costs and ongoing costs.
Up Front Costs-Up front costs include your down payment, closing costs also known as settlement costs, and moving expenses. It can also include your down payment or the deposit you put down to show the seller you are earnestly intending to purchase the home.
Down Payment- Usually a homebuyer needs a loan or mortgage from a lending institution. The majority of mortgage products require you to contribute some portion of your own money (amount of your down payment). Lenders believe you are less likely to walk away from your home if you invest some of your own money towards the purchase.
At one time lenders expected borrowers to make down payment towards the purchase price of at least a 20 percent. For example a homebuyer would need a down payment of $30,000 to buy a house that was selling for $150,000. FHA loans allow a buyer to purchase a home for as little as 3.5 percent down, but you will have to have private mortgage insurance (PMI), which helps the lender in case you fail to repay your loan. The PMI however may add another $100 to the monthly payment.
Closing Costs-Not only do you need to have a down payment, you need to be ready to pay other up front costs that come with buying a home. Together they are known as Closing costs. These costs can range from 3 percent to 6 of the mortgage. Sometimes these fees can be even higher.
For example buying a $150,000 house with a 5 percent down payment of $7,500, you can expect to pay anywhere from $4,275 to $8,550 in closing costs on your mortgage of $142,500. Your lender or real estate agent may be able to suggest to you different ways you can obtain down payment assistance programs for first time or low income homebuyers.
Moving in Costs-You may also need to consider what it will take to move into your new home. If the house you are buying is need of repair, you will need money for that. You may also need to buy appliances like a stove and refrigerator. Be sure you have money put aside for these items.
Continuing Costs-If you currently rent, you are probably used to just paying your rent every month. But as a homeowner, your costs will include: mortgage payment, property taxes, homeowners insurance, possible mortgage insurance, utilities, and maintenance and repairs. You may also have to pay, as most condominium owners do, an association fee.
Monthly Mortgage Payment-If you are renting you are probably already used to having to making a monthly payment towards your housing. Mortgage payments include the repayment of principal (the amount you actually borrowed) and the interest (the cost of borrowing money) Lenders refer to payments for principal and interest as "P&I".
The amount of your mortgage payment is dependant on the amount you borrow, your interest rate, the repayment period or term of your loan, and whether your mortgage is fixed or an adjustable rate. For instance:
A $100,000 mortgage at a rate of 8 percent for 30 years will have a monthly payment of P&I only would have a payment of $734. On the other hand the same loan amount of $100,000 at a rate of 8 percent for 15 years will have a P&I only payment of $956.
The bigger your loan amount and the higher your interest rate, the larger your monthly payment will be. So how are monthly payments calculated? Most mortgages are fully amortized. This means that at the end of the loan term, usually after 30 years of making the same monthly payment, you will have paid the entire amount of the principal and all the interest owed the the lender. After that, the house will be yours free and clear.
Taxes and Insurance (T&I)-Most of the time a monthly mortgage payment will include not only the principal and interest (P&I), but also property taxes, homeowners insurance, and private mortgage insurance. The lender will hold these additional amounts in a separate escrow account and then pays the tax and insurance bills when they come due. This way the lender is able to ensure these expenses are paid on time. Think of it as a forced saving account for these items. If lenders did not do this, homeowners may not be prepared to pay these bill when they are due.
Taxes and insurance are an essential part of of a homeowner's housing costs, lenders refer to all the items included in a mortgage payment as PITI, or principal, interest, taxes, and insurance.
Additional Costs-Your other ongoing costs will include utilities (gas, electricity, water), as well as trash, homeowners dues, and maintenance costs. First time homebuyers often experience sticker shock and are often surprised by the high cost of basic upkeep. Utilities costs can vary greatly (your gas bill will probably increase in the winter and your electric bill in the summer). Repairs are often an expected expense. For that reason, homeowners should have an emergency fund.
All of these fees may seem like a negative to homeownership. But remember the plus side. Homeowners receive significant federal income tax benefits.
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