The question of how much it costs to buy a house depends on many factors: the lender you choose, your credit score, the competitiveness of the housing market, and more. But understanding some of the basic costs can help you decide if now is the right time to buy—and can even save you money on your new home.
1) How much is a down payment on a house?
As a first-time homebuyer, you may be wondering, what exactly is a down payment? This is the cash deposit you pay toward a home's purchase price, and it's usually the biggest up-front cost when you buy. You may be able to put as little as 3% down, though most buyers put down more. You could also receive money toward your down payment through a down payment assistance program.
Mortgage insurance: the cost of a low down payment
One drawback to a low down payment is private mortgage insurance (PMI), which protects your lender in case you can't pay your mortgage. If you put down less than 20%, you'll probably have to pay for PMI. This cost is added to your monthly mortgage bill and can also add thousands to your closing costs for some loans, like FHA. A few don't require PMI at all, so ask your lenders about the best options available to you. As a general rule, the larger your down payment, the less you'll pay in PMI.
Benefits of a larger down payment
Besides lowering your PMI, a higher down payment has other advantages:
- Better interest rate: More money down can qualify you for a lower interest rate, which will save you a bundle over time. Your savings will depend on how long you stay in the home.
- More loan options: Some low-down-payment loans limit how you can use the home, when you can sell it, or how soon you can refinance. More options mean more flexibility.
- Stronger offers: A larger down payment is usually more appealing to sellers, especially if you're competing with other buyers.
Despite the benefits, sometimes it's just not possible to save up a larger down payment, and it makes sense to take advantage of special loans or other programs. Weigh your options with your lender based on your finances, your future plans, and the home you want to buy.
2) What typical closing costs can I expect?
Most first-time buyers focus on down payment when asking, "How much does it cost to buy a house?" But don't forget about closing costs. These are the fees and other expenses associated with the purchase and sale of a home. So how much are closing costs on a house, and what do they include?
- Closing costs usually total 2%–5% of the home’s purchase price.
- They're due with your down payment when you close on the home. Just like your down payment, you'll need enough available in your bank account to cover these costs on closing day.
- Typical closing costs include lender and escrow fees, insurance, and taxes—costs associated with completing the home sale and making the home legally yours. Learn more about closing on a home.
Lender fees are negotiable, and some lenders don't charge a fee at all. When you get pre-approved, make sure to ask about these fees (also known as "origination fees" or "processing fees") and shop around so you can compare costs.
Closing cost assistance
There are many programs that can help cover closing costs for eligible first-time homebuyers. These may offer grants, loans, or cover the full amount you would pay in typical closing costs. You may also be able to lower your closing costs by choosing a lender with low or no fees, or negotiating certain costs with the home seller. Your lender or real estate agent can help you determine the best options for you.
Inspection and appraisal fees
These fees aren't usually part of your closing costs, but if you have an inspection and appraisal done, you'll be responsible for paying them before you close. An inspection helps identify major problems with the home, while an appraisal determines the home’s value. Most buyers have these done, and they can cost $300–$400 or more.
3) What are my monthly household expenses?
Closing day isn't the end of the story. You'll need enough room in your budget to cover your monthly household expenses, and it's always a good idea to set aside some savings for occasional repairs and updates to your new home.
Mortgage payments
First, calculate your monthly mortgage payment. Mortgage payments vary widely depending on the type of loan, loan terms (number of years), and interest rate on the loan. An online mortgage calculator can estimate this for you based on the price of the home, your down payment, and other details.
Your credit can also affect your interest rate and monthly payments. If your credit score isn't as high as it could be, talk to your lender about how to bring it up fast, or learn how to improve your credit score.
Utilities
Depending on your prior housing arrangements, a utility bill could come as a surprise to the costs of owning a home. Some landlords include bills for sewer, water, and garbage in the rent, so it can be hard to know what they cost. As a homeowner, you'll need to factor these into your budget. Other utilities include internet, cable TV, natural gas, and electricity. See tips on budgeting for utilities or find out the average costs in your state.
Property taxes and insurance
When you buy a home, you’ll pay a portion of your property taxes and homeowners insurance at closing. But you'll also have to pay them on an ongoing basis for as long as you own your home. Property taxes can vary widely depending on the value of your home, location, and tax changes each year. Your lender should give you the option to set up a special account, known as an "escrow" account, to make future payments on taxes and insurance so you don't have to worry about tracking these bills.
HOA fees
If you've purchased a condo or home that belongs to a homeowner’s association (HOA), you'll need to budget for HOA dues in your household expenses. These monthly fees are generally used for property maintenance in some neighborhoods and condo properties. HOA dues can range from $100 to over $1,000 depending on the property and location.
Takeaway: How much does it cost to buy a house?
As you start your homebuying journey, creating a budget is a great first step. Talk to several lenders and get pre-approved early so you can better understand your financing options and the costs that are specific to your situation. With smart planning, homebuyer assistance programs, and guidance from real estate pros, your dream of homeownership may be closer than you think.