Buying a home is one of the biggest financial commitments most people will ever make. But there are also hidden costs that many homebuyers don’t consider until they’re knee-deep in the process. There are plenty of fees and costs associated with homeownership that aren’t included in the up-front price of the house itself—and some of them can be substantial enough to turn even the most optimistic homebuyer sour. Here are some things to keep in mind before signing on the dotted line:
Earnest money
If you’re buying a house and paying for it in cash (no mortgage), you’re obligated to pay a “lump sum” called an “earnest money” to the real estate agent. This amount is generally between two and five percent of the purchase price, but can vary widely. Earnest money is used by the seller to cover holding and inspection costs, escrow fees, and other contingencies throughout the home-buying process. Earnest money is non-refundable and must be paid in cash—and often in the form of a personal check.
Appraisal fee
If you’re buying a home and the deal closes, the seller is legally obligated to pay your lender a “discount” from the sale price called an “appraisal fee.” This fee is generally between $2,000 and $6,000, although it can vary depending on the location, size, and type of home you’re looking to purchase. The appraisal fee covers the cost of hiring a licensed appraiser to evaluate the property’s worth and ensure that it meets the lender’s standards for financing. If your appraisal comes in higher than the purchase price offered by the seller, your lender may require you to make a higher down payment or pay a higher interest rate on the mortgage.
Mortgage fees and prepayment penalties
While most homebuyers may be familiar with the monthly mortgage payment that comes due each and every month, few are aware of the other fees associated with homeownership. The average homebuyer is likely to pay a minimum of $2,000 in up-front fees—and sometimes much more. The most common fees include an appraisal fee, loan origination fee, appraisal contingency fee, and escrow fee. The average homebuyer will also pay a prepayment penalty, which can be as high as six months worth of interest.
Home inspection fee
Every homebuyer should have the home they’re purchasing inspected by a certified inspector. But many homebuyers mistakenly believe that homebuyer’s insurance will cover the cost of a home inspection. In fact, homebuyer’s insurance only covers damage to the property caused by a named peril, such as fire, flood, or theft. Home inspections are necessary to ensure the home is up to code and meets the buyer’s standards. A home inspection can also help you negotiate a better deal on the purchase price by identifying issues with the home that can be resolved before the purchase closes.
Mortgage loan origination fee
Every time you apply for a mortgage, you’ll pay a fee to the lender. This fee is generally between 0.5 and 1.5 percent of the loan amount, and is often referred to as “origination fee.” The origination fee covers the lender’s costs associated with processing your loan application, underwriting your request, and finding a lender who is willing to lend you money. The origination fee is due when you close on the loan and serves as the lender’s profit. Lenders are allowed to charge origination fees, but many homebuyers mistakenly believe that fees are excessive. In fact, many state and federal agencies regulate the amount of origination fees that can be charged by lenders.
Homeowner’s insurance
The cost of homeowner’s insurance is often overlooked by first-time homebuyers. The average annual cost of a standard homeowner’s insurance policy is $1,000, but can range from $500 to more than $2,000. Homeowners should shop around to find the best rates, as there are numerous organizations that provide homeowner’s insurance, including independent companies, associations, and government programs. There are also a number of factors that can increase or decrease your insurance premiums, including your home’s location, type of construction, type of contents, and the number of people living in the home.
Conclusion
Buying a house is a significant financial decision, and homeownership can be a rewarding experience if you do your research and consider all of your options. It’s important to remember that buying a home isn’t a one-time event—it’s an ongoing financial commitment that lasts for years. Be sure to research all of your options before making any decisions, and be sure to ask lots of questions to make sure you’re getting the best deal possible.