If you’re preparing to join the ranks of homeowners, whether you are just starting to daydream about it or are actively scanning listings, it’s important to understand the costs involved. You’ll probably hear a lot of talk about mortgage rates as you enter this realm, and, while your home loan will certainly be a critical expense, it’s just one of the things to budget for.
Here, you’ll learn about all the expenses involved in owning a home, from that mortgage to home maintenance; from homeowners insurance to utilities. Equipped with this intel, you’ll be better prepared for the true cost of having your very own place and making sure you’re ready for your big purchase.
Costs of Purchasing Your Home
When you think of buying a home, you may well be focused on accumulating that bundle of cash known as the down payment. But there are more costs associated with buying your home than simply that expense.
The down payment is probably the largest initial cost you’ll take on, but don’t be blindsided by the additional fees you’ll need to pay. You can find out how much home you can afford with a home affordability calculator or keep reading to learn about the typical costs associated with owning a home.
💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.
Historically, the magic number for a down payment has been 20% of the home’s value. If you’re thinking that’s impossibly steep, take a deep breath. The median down payment on a conventional loan recently clocked in at about 6% among first-time homebuyers. And conventional home loans can be had with as little as 3% to 5% down.
So 20% may no longer be standard, but, if you put down anything less, you may pay private mortgage insurance (PMI) on top of your monthly mortgage.
PMI can make it possible for many buyers to put down a more affordable down payment while protecting the bank’s investment if you were to default on the loan. The downside of PMI is the additional payments you’ll need to make each month until you are eligible to remove this insurance from your mortgage payment. Typically, PMI is canceled when your principal balance reaches 78% of the home’s original value (meaning the purchase price).
As you think about how much of a down payment to make, it could be tempting to make as large a payment as possible to help minimize your monthly mortgage payment and avoid PMI. Keep in mind that doing so can leave you little wiggle room financially for the additional costs associated with your home down the line. If you make a large down payment, it can help to have money reserved as an emergency fund and for unexpected home repairs.
Your down payment won’t be the only thing due on closing day. In addition to the down payment, you’ll be expected to cover closing costs. Closing costs typically cover things like:
• Title insurance
• Title search fees
• Appraisal costs
• Escrow or attorney fees
• Lender fees
Closing costs can vary based on factors such as the purchase price of your property, but you can expect to pay an estimated amount somewhere between 3% to 6% of your loan amount in closing costs.
Home Ownership Costs
You may think that being a homeowner involves affording the down payment on a house and the monthly payment of principal and interest on your mortgage, but there’s more to be prepared for. Here are some extra costs you may want to save and budget for.
Your monthly mortgage payment could be just the funds paid to the bank, a combination of principal and interest, or it could be a few different payments rolled into one single bill. Your mortgage payment might include some or all of the following:
• Principal: This is the repayment of the initial loan you took out to purchase the home. Paying the principal is paying off the remaining balance of what you owe on your home to your lender.
• Interest: Depending on the terms of your mortgage, the interest could be fixed or variable. You are paying this every month for the privilege of borrowing the funds to buy your home. It’s one of the ways banks make money.
• Property Tax: If your mortgage has an escrow account, a portion of your mortgage payment may go towards your annual property tax bill. Property tax is paid to your local government and usually goes towards funding public schools, public works, libraries, parks, city government, and maintenance. The amount of property tax you’ll pay is calculated as a percentage of the value of your property. The percentage varies by location. Some homeowners may pay this separately, directly to their town.
• Insurance: If you’re paying into escrow, you’ll probably pay a portion of your homeowners insurance policy each month instead of a lump sum once a year. You’ll work with your insurance provider to determine the coverage of the policy, but standard home insurance typically provides protection against certain unexpected events, like damage caused by a fire or a break-in. Policy specifics will vary.
• PMI: If your initial down payment was under 20%, you may be responsible for PMI, as described above. This payment can be anywhere from 0.2% to 2% of your loan amount per year.
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Unlike a rental where you may only pay for gas and electricity, when you own a home, you’re on the hook for all utilities, which can include water, gas, heat, electricity, sewer, and trash/recycling. Utilities will vary based on your location, as well as the size of your home, but the national monthly averages are as follows:
• Electricity: $117.46
• Water: $45.44
• Broadband internet: $59.99
• Gas: $61.69
• Waste services: $66.20
• Phone: $114.
These figures vary based on area and activity, but taking steps to save energy on heating and cooling could lower your monthly bills. Depending on where you live, utility providers might offer an option to set a fixed rate for the year, so you’ll pay the same amount each month instead of paying a bill that varies with the change in the seasons (say, soaring in the summer as people switch on the air conditioning).
Improvements & Repairs
Your dream home might just be a few renovation projects away, but remember to factor the cost of those updates into the true cost of owning your home. Not only that, but strategic improvements can greatly increase the resale value of your home.
The cost of home improvement projects vary widely based on what you’re working on. A recent survey by Houzz found that the median cost for a home renovation was $22,000 in 2022.
Home maintenance entails the general upkeep of things like your property’s systems, structures, and appliances.
Upkeep costs can be more predictable than some repairs. One rule of thumb says to budget 1% to 4% of your home’s value for annual maintenance. A variety of these projects might be DIY-ed, but you’ll want to budget in the cost of tools and supplies.
You can’t predict the exact lifespan of your appliances and home systems, but a general idea can make it easier to anticipate future costs. When you buy your home, take note of how old the appliances and other systems are, so you can have a better idea of when you’ll need to replace them.
For example, a refrigerator could last between 10 and 18 years, but you might benefit in terms of energy efficiency by replacing an old power-guzzling appliance sooner. Consider the outside structure of the house as well, such as the roof, siding, and gutters. It may be helpful to get a quote from a contractor for any larger repairs or renovations you plan to complete so you can factor that into the costs of owning a home.
Recommended: The Cost of Buying a Fixer-Upper
The time and money required to own and maintain a home can be considerable. There are the monthly costs, which can involve mortgage, insurance, property taxes, and utilities, as well as annual maintenance. Plus, sooner or later, you are likely going to have to replace an appliance, repair a roof, or otherwise update your home.
Understanding and estimating the costs of owning a home can be an important step before joining the ranks of homebuyers. It can also impact what size and sort of mortgage you get and from which lender. That’s an important area to wrangle your costs as you think about your overall budget.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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