This blog post is excerpted and adapted from one of the free Delta Community Financial Education Center workshops, Costs of Home Ownership, which is being presented this month and is available to both Credit Union members and the general public. Please visit the Delta Community's Events & Seminars page to register for the Financial Education Center’s monthly, no-cost webinars with practical advice on managing personal finances. The work of the Financial Education Center reflects the Credit Union’s mission to help both its members and others in the community achieve financial success.
Please note that the workshop related to this post dives much deeper into the topic of home-buying costs, and we recommend that anyone interested in home ownership look into attending the presentation if they have time.
Homeownership is an important life goal for many people. However, the true cost of owning a home includes expenses beyond just monthly mortgage payments. From financing, insurance and property taxes, to utilities, maintenance and repairs, it’s important to be fully aware of what to be prepared for before purchasing a home.
It is common for real estate agents to tell prospective buyers that owning a home is cheaper than renting a comparable property. In many situations that’s true, specifically in terms of a mortgage payment versus the monthly amount that would be paid for rent—and rent has been dramatically rising over the past year in many cities. But as a home owner, there is also the entire responsibility of managing the home and expenses of everything that comes with it. So what exactly are some of the key costs to consider when buying a home?
What are the many closing costs you may encounter?
While the mortgage payment is usually the first cost that homebuyers focus on during a home purchase, there is a range of related costs that need to be accounted for, including numerous costs that make up the closing—the actual purchase of the home. Besides the mortgage, here are some of the potential closing costs that should be considered in a home-buying budget:
- Credit report. The credit report from credit rating agencies affects how much money can be borrowed at what interest rate from a financial institution, and it is essential in the purchasing process. One free annual copy of your credit report can be obtained from annualcreditreport.com or by calling 1-877-322-8228; if you need more than that annual report then the credit reporting agencies generally charge a fee for them.
- Appraisal fee. It’s important to a lender to know if the property is worth as much as the amount the buyer wants to borrow. This is for two reasons: The lender needs to verify the amount wanted for a loan is justified and make sure it can recoup the value of the home if the purchaser defaults on the loan.
- Home inspection fee. Most lenders require a home inspection, especially if you’re getting a U.S. government-backed mortgage, such as an FHA loan insured by the Federal Housing Administration. The inspection looks for structural, plumbing and electrical system defects, along with other potentially serious problems with the home.
- Pest inspection fee. This fee covers the cost of a professional pest inspection for termites, carpenter ants, rats, dry rot for wood and pest-related damage. There are some states and some federal government-insured loans that require this inspection.
- Loan origination fee. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees.
- Lender’s title insurance. Most lenders require what’s called a lender’s title insurance policy; it protects them in case there’s an error in the title search for the property and someone makes a claim of ownership on the property after it’s sold. The policy coverage lasts until the mortgage is paid off.
- Attorney’s fees. These fees may range into the hundreds of dollars for legal services associated with the transaction, which includes, but not limited to, a title search to ensure there aren’t any issues with the title of the home such as outstanding ownership disputes or additional liens on the property.
- Prepaid expenses—loan interest, homeowner's insurance and property taxes.These expenses may be associated with the mortgage loan and with homeownership. Typically, the buyer needs to pay the interest on their loan between the time they close on the property and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and six months or a years’ worth of property taxes. Which may also require a buyer make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.
- Loan points. Points or discount points are a charge a buyer pays upfront to the lender in exchange for a lower the interest rate. Points are part of the cost of borrowing money and are calculated as a percentage of the loan amount. Learn more about points.
- Private Mortgage Insurance (PMI). If a buyer’s down payment is less than 20% your lender may require that you take out PMI, which protects the lender if you stop making payments on your loan.
The above list only covers a few of the typical closing costs; depending on the type of home and its location, there may be other specialized costs, such as a requirement for flood insurance for homes in areas that are prone to seasonal flooding. Before a closing is scheduled, a buyer will receive disclosures from their lender to ensure they are aware of all costs and have the funds accessible for paying them at closing.
Other thoughts on money and homes
For more helpful financial information, remember to check out the free Delta Community Financial Education Center webinar calendar on a range of money-related topics.
The Credit Union’s blog has more information that could be interesting and useful:
Do you have good BALANCE?
BALANCE is a financial education and counseling organization that offers free services to Delta Community members. Some of its services include, credit report reviews, debt management, budgeting and money management and home buying.
BALANCE’s Pathways to Homeownership program is a comprehensive online education program designed for first-time homebuyers to fully understand the process and obligations of becoming a homeowner, and it meets the National Industry Standards for Homeownership Education and Counseling.
Visit the BALANCE website to learn about their education and assistance programs. Members can also speak with certified credit and housing counselors to get personalized guidance. Note that the services offered through BALANCE are separate and distinct from any business conducted with Delta Community and are not guaranteed by, nor are they obligations of, the Credit Union.
