Does the home-buying process intimidate you? Between saving for a down payment, navigating the mortgage application process, finding a realtor, and actually finding a home you want to buy, there are a lot of moving pieces to keep track of.
But even with all of the intricacies of buying a home, with the proper savings and preparation, homeownership is not out of reach. Millennials made up 61% of first-time home buyers in 2018. And millennials ages 24 to 38 made up 42% of the homebuyers in the U.S.
Figuring out how to buy your first house takes a lot of budgeting, especially when you consider that the housing prices are higher than ever and many young adults are burdened by student loans. Maybe you’ve played with a home affordability calculator or have a down payment number in the back of your mind as a savings goal.
Unfortunately, figuring out exactly how much that new home will cost you—both at the time of purchase and on a monthly basis can be a little more complicated than just doing some back-of-the-envelope math. Luckily, with some advance planning, you can figure out what your dream home will likely cost you.
How to Calculate Closing Costs
If you’re a first-time homebuyer, you’ve likely been focusing most of your energy on squirreling away extra savings for a down payment. But a down payment is just one part of the total budget you should establish for buying your first home.
What Are Closing Costs?
In addition to your down payment, you will need to pay for a variety of closing costs. Closing costs range from third-party fees charged by the professionals, like appraisers and title companies who help you finalize the purchase, to lender fees and home warranty fees.
What is the Average Closing Cost for Home Buyers?
These costs might seem like a lot to digest, but don’t let them scare you. Although you need to be concentrating on saving for more than just a down payment, closing costs generally fall between 2% and 5% of the total cost of your new home.
This means it’s easy to do a rough calculation of how much you need to save for closing costs. Add this amount to your savings goals, and you won’t be surprised by closing costs when you are ready to make an offer on your dream home.
Who Pays Closing Costs?
The good news is that closing costs are traditionally divided between the buyer and the seller, so you won’t necessarily be on the hook for the whole bill.
That being said, the exact division between buyer and seller will depend on your individual circumstances, and can even be a point of negotiation during the buying process.
Here are some of the closing costs a first-time homebuyer should account for:
Lender fees. This is the cost the lender charges for processing your loan. Depending on your individual circumstances, this is usually paid to the lender at closing.
Appraisal, inspection, and survey fees. It is easy to be wooed by pristine wood floors and a shiplap statement wall, but you and your lender want to make sure that your potential new home is actually worth the purchase price. This means paying professionals to double-check that there are no major issues with the house and to provide a current market value.
Settlement Agent, Lawyer, or Escrow fees. It turns out that paperwork can be difficult and is easy to mess up—a settlement agent or lawyer is typically required so that your lender can be sure everything is properly prepared and signed.
Title service. To make sure you’re buying property that actually belongs to the seller and that the property isn’t subject to any legal obligations, it’s necessary to do a title search. Your lender will likely require a lender’s title insurance policy for their protection; you may also want an owner’s title insurance policy to protect yourself. The buyer and seller often divide these costs.
Recording fees. When the title of the property is transferred from the seller to you, legal documents need to be recorded in the county records to make sure the property is correctly transferred into your name. County recorders typically charge fees for doing this.
Home warranties. Warranties can be purchased to protect against major problems in the first years of ownership. A warranty plan is often offered by the seller as part of the deal, or a buyer can purchase a warranty from a private company to cover any major issues that arise. Your lender, however, will not require this warranty.
Private mortgage insurance. Often lenders require private mortgage insurance (PMI) if you make a down payment that is less than 20% of the purchase price. This is usually a fee that you pay monthly, but it can also be paid at the time of closing.
Other Costs of Buying a New Home
In addition to your down payment and closing costs , you also need to make sure that you can swing the full monthly costs of your new home. That means figuring out not only your monthly mortgage payment but all the ancillary costs that go along with it.
Understanding and preparing for these costs can help ensure that you are in sound financial shape for your first few years of homeownership:
Principal and Interest. Your principal and interest payment is the amount that you are paying on your home loan. This can be estimated by plugging your sales price, down payment, and interest rate into a mortgage calculator. This number is likely to be the biggest monthly expense of homeownership.
Insurance. Your homeowner’s insurance premium should be factored into your monthly ownership costs. Your insurance agent can provide you with details on what this policy will cover.
Property taxes. Property tax rates vary throughout the country. Property tax rates are typically set by the local taxing authorities and may include county and city taxes.
Private mortgage insurance. As mentioned above, private mortgage insurance (PMI) may be required with a down payment of less than 20%. PMI is usually required until you have at least 80% equity in your home based on your original loan terms.
Homeowners association fees. If you live in a condo or planned community, you may also be responsible for a monthly homeowners association fee for upkeep in the common areas in your community.
Calculating all of these costs together is necessary to determine the true monthly cost of owning a home. Although it can seem overwhelming, planning for these costs can help set you up for home-buying success.
Mortgages With SoFi
When you’re ready to take out a mortgage and buy a new home, consider SoFi. When you take out a mortgage loan with SoFi, you have several options that are likely to suit your needs.
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