When buying a home, it\u2019s important to understand all the costs involved. The purchase price that you negotiate is just the starting point, but the final amount ends up being quite a bit higher. \n\n\n\nMost people immediately think of closing costs when assessing home ownership, which generally break down to between two and five percent of a home\u2019s value. This is on top of the total commissions paid to agents, which typically add up to another 5-6% of the purchase, split between a seller\u2019s and buyer\u2019s agent. (Though, here at REX, we are able to keep those fees lower.)\n\n\n\nFrom loan origination fees to title search fees, there are a lot of individual expenses that come with buying a home \u2013 some of which you might not even be aware of, especially if you are a first-time home buyer. \n\n\n\nDon\u2019t let these extra expenses sneak up on you. If you are new to the home-buying process, or simply haven\u2019t bought in a while, this article will break down all of the common expenses you need to anticipate when buying a home. \n\n\n\nWhat are the closing costs when buying a home?\n\n\n\nDown Payment\n\n\n\nOne thing you\u2019ll want to consider before calling the real estate agent is how much money you have saved to cover your down payment. The higher your down payment, the lower your monthly interest rate will be on your mortgage payment.\u00a0\n\n\n\nMajor financial institutions, like banks and credit unions, offer two types of loans: conventional and government issued. The loan you choose will have a big impact on the down payment required. \n\n\n\nConventional loans \n\n\n\nConventional loans are those where the lender is not insured or backed by the federal government. These loans often have excellent interest rates but require bigger down payments. Lenders often require borrowers to put a minimum of 10 percent down to qualify for conventional financing, although they may offer better interest rates to buyers who come to the table with 20 percent down.\n\n\n\nGovernment-issued loans\n\n\n\nGovernment-issued loans include FHA loans, VA loans, and USDA loans. With these types of loans, the lender is insured by the federal government. This insurance protects the lender in case the homebuyer defaults, which lenders worry could happen if the buyer has less of their own money invested in the purchase. Because of the federal backing, lenders require a smaller down payment for these types of loans. \n\n\n\nFederal Housing Administration loans (FHA loans) are available for most qualified borrowers \u2013 regardless of income, age, or homeownership experience \u2013 and require a minimum of 3.5 perfect down. \n\n\n\nDepartment of Veteran\u2019s Affairs loans (VA loans) are available to military service members, veterans and their families and require zero down.\n\n\n\nU.S. Department of Agriculture loans (USDA loans) are available to rural homebuyers whose income is no higher than 115 percent of the adjusted area median income (this figure varies by county). These types of loans also require zero down payment. \n\n\n\nHomeowner\u2019s and Mortgage Insurance\n\n\n\nWhen buying a home, there are two kinds of insurance to consider: homeowner\u2019s insurance and private mortgage insurance. \n\n\n\nHomeowner's Insurance \n\n\n\nHomeowner's insurance protects you financially from unexpected events that damage your home, such as natural disaster, theft, or vandalism. Though homeowner\u2019s insurance isn\u2019t required by law, most mortgage lenders require it in some form. You\u2019ll want to make sure the amount covers your down payment and is equal to the cost to replace the home and all your possessions within the home. The cost significantly varies, and there are many options, so it\u2019s best to compare offers to keep the expense as low as possible. Often, anywhere from two months to an entire year\u2019s worth of insurance is due at closing.\n\n\n\nPrivate Mortgage Insurance\n\n\n\nPrivate Mortgage Insurance (PMI) is usually required if you get a conventional loan and put less than 20 percent down. Borrowers are required to carry private mortgage insurance until they\u2019ve paid 20% equity into their home. \n\n\n\nFHA and USDA borrowers with less than 20 percent down are required to pay a mortgage insurance premium (MIP) for the lifetime of the loan. This cost also varies based on your loan-to-value ratio, but it typically ranges between 0.45 and 1.05 percent of the loan and is paid annually, according to the Federal Housing Administration.\n\n\n\nLender fees\n\n\n\nThis is the umbrella under which many closing costs fall under including document preparation, underwriting, and origination. Third-party fees are often included as well, such as the appraisal fee, credit report fee, flood certification fee, survey fee, tax service fee, and title insurance fee.\n\n\n\nAppraisal fee\n\n\n\nMortgage lenders require an appraisal before signing off on a loan. The fee, paid by the buyer, can run anywhere from $200 to $500 and will vary by property type, square footage, and location.\n\n\n\nCredit report fee\n\n\n\nThe credit report fee may be combined by a lender into the application fee. Each loan applicant will need a report. The fee is usually not more than $30 per applicant.\n\n\n\nDocument preparation fee\n\n\n\nLenders sometimes charge a document preparation fee to the borrower for the gathering of any legal documents related to the mortgage. This administrative fee, which is usually about $200, may be negotiable, and some lenders might waive it altogether.\n\n\n\nFlood certification fee\n\n\n\nYou will need to determine if you home is in a flood zone before your loan closes, and the fee usually ranges from $15 to $25. If the home is in a flood plain, you will need to buy flood insurance, paid separately.\n\n\n\nLoan origination fee\n\n\n\nThis fee goes to the lender or broker to cover the costs of processing the loancosts. Generally, this fee is at least one percent of the total loan, although it may be more. Often, Tthese additional \u201cadministrative fees\u201d are baked into and other upfront lending costs are also called points, and one point equals one percent of the loan. \n\n\n\nSurvey fee\n\n\n\nYou\u2019ll usually need to pay for a land survey to verify property lines and to make sure walls and fences are in the correct place. Surveys tend to start at around $350.\n\n\n\nTitle search fee\n\n\n\nBefore you buy your home, you will need to pay a title company to research property records to make sure no one else holds the deed to the property in question. Depending on the complexity of the search, it may cost between $150 and $500.\n\n\n\nUnderwriting fee\n\n\n\nBefore a mortgage application is approved, it will be sent to underwriting, where a financial expert known as an underwriter will evaluate your finances and credit history to determine how much of a risk a lender will take on by funding your loan. For this detailed look into their past financial behavior, the buyer will generally see an underwriting fee of approximately $400 to $900 included in the itemized closing costs provided by their lender. If the loan does not close, the buyer is usually freed from having to pay the fee.\n\n\n\nAdditional Closing Costs\n\n\n\nApplication fee\n\n\n\nSome lenders charge buyers an application fee to process an application for a loan. Generally, this is several hundred dollars, although sometimes there is no fee at all.\n\n\n\nAttorney\u2019s fee\n\n\n\nAt REX, the attorney\u2019s fees are covered in the cost of the home.\n\n\n\nCalifornia Documentary Transfer Tax\n\n\n\nThis is a tax imposed by the county or city on the sale of a property. The buyer or seller may pay (or there may be a split). The county transfer tax is $1.10 per $1,000; additionally, some cities collect their own tax.\n\n\n\nAgent commissions\n\n\n\n Real estate agent commissions typically run between five and six percent, with half going to the buyer\u2019s agent and half going to the seller\u2019s agent. While technically paid for by the seller, these fees are factored into the asking price of the home and passed on to the buyer in the form of a higher monthly mortgage and down payment. Remember that commissions are negotiable. Some brokerages, like REX, already charge lower fees to account for technological advancement in the industry and the fact that today\u2019s buyers do most of the work to find their home online.\n\n\n\nDiscount points\n\n\n\nIn exchange for a lower interest rate, a buyer can pay \u201cdiscount points,\u201d which are essentially lender fees paid up front to reduce your monthly mortgage payment down the road. A point is equal to roughly one percent of the total loan amount, or $1,000 for every $100,000 borrowed.\n\n\n\nEscrow or settlement fee\n\n\n\nWhen you purchase a home, a neutral third-party lawyer or escrow company will be used to hold your earnest money (a refundable amount put down to confirm the contract) and complete all of the transfer documents, including the title and other paperwork needed for the lender to fund your mortgage loan. Generally, the cost for this service is about half a percent of the purchase price.\n\n\n\nHome inspection fee\n\n\n\nA home inspection can range from $200-$1,000, depending on the size of the home and the thoroughness of the inspection. While not usually required, it is highly recommended that both buyer and seller obtain one.\n\n\n\nUpfront interest payment\n\n\n\nAt closing, lenders usually require an upfront payment from the buyer of any interest that will accrue on their loan between contract settlement, or closing day, and the first mortgage payment. The amount paid varies by your mortgage amount and final interest rate.\n\n\n\nNotary fee\n\n\n\nA licensed notary public will usually need to be present at closing to walk the borrower through the loan documents and ensure they are correctly signed, dated, and notarized for legality. Most notaries are mobile and charges can range from $10-$25 per document.\n\n\n\nRecording fee\n\n\n\nThe city or county in which you are buying your home will usually charge a fee for recording your home purchase in public land records. Actual fees vary by area.\n\n\n\nTitle insurance\n\n\n\nThere are two types of title insurance, lender\u2019s policy title insurance and owner\u2019s policy title insurance. Owner\u2019s policy title insurance protects you, as the new homeowner, from any claims on the property. Lender\u2019s policy title insurance protects the lender from claims on the property.\n\n\n\nWood destroying pest inspection and allocation of costs\n\n\n\nMany lenders require that homes receive an inspection for termites and other wood-destroying pests before they will sign off on a mortgage loan. These inspections usually cost about $150.\n\n\n\nOngoing Costs of Owning a Home\n\n\n\nNow that you\u2019ve made it through the buying process, you\u2019ll need to pay for ongoing costs related to ownership. These include:\n\n\n\nMortgage payment\n\n\n\nWe\u2019ll start with the most obvious expense. Unless you buy a home in cash, you\u2019ll have to make a mortgage payment each month. Part of that payment will go towards your principal balance and part will be used to pay insurance to your lender.\n\n\n\nProperty taxes\n\n\n\nYour property will be reassessed upon your purchase, and you will owe taxes based on that assessment. Most commonly, taxes are factored into your monthly mortgage payment and kept in an escrow account that your lender then sends to pay off your taxes semi-annually. \n\n\n\nHomeowners insurance\n\n\n\nIf you have a mortgage on your home, you\u2019ll most likely be required to maintain homeowners insurance policy. According to 2021 insurance carrier data, the average annual premium for homeowners insurance is $1312 (about $109 monthly), based on a policy with a dwelling coverage limit of $250,000. However, depending what state and zip code you live in, average prices can range from several hundred dollars to more than $3000 per year.\n\n\n\nHOA fees\n\n\n\nNot all homes will have homeowner\u2019s association fees, but it\u2019s best to ask so there are no surprises. These costs depend on the amenities associated with the housing development, and can range from less than $20 per month to several hundred dollars or more Be sure to ask the seller for HOA documents as soon as you go into contract, so you can see how often HOA fees are assessed (whether it\u2019s monthly, quarterly or annually), what amenities and utilities are included in the HOA fee, and whether the HOA is doing its due diligence to manage communal expenses such as landscaping and pool maintenance. You will also want to ensure that the HOA is keeping a healthy cash reserve to account for future upkeep of commonly owned property, such as the roof on a row of townhomes.\n\n\n\nHome maintenance and repairs\n\n\n\nNormal wear and tear is unavoidable, so you\u2019ll want to make sure you budget for repairing or replacing appliances and major structures and add systems, such as the HVAC or a leaky roof. It\u2019s recommended that you budget 1 percent of your home\u2019s value for home maintenance each year.\n\n\n\nUtilities\n\n\n\nYou\u2019ll also need to pay for utilities, likely including water, sewer, gas, and electricity. These costs vary according to location, but the general rule of thumb is the larger the property, the more your utilities will cost. Ask the seller what they pay on average for utilities so you can factor these bills into your estimated monthly payment.\n\n\n\nBottom Line on Closing Costs\n\n\n\nBuying and owning a home is no small investment, so you\u2019ll want to consider both the one-time closing costs and ongoing expenses of homeownership against what you can realistically afford to pay. Keep in mind that a larger down payment on a home will generally mean a lower monthly mortgage payment in the long run. However, when trying to determine your monthly out-of-pocket expenses, you\u2019ll want to keep in mind the necessity of paying for periodic home maintenance, repairs, property taxes, and applicable HOA fees. \n\n\n\nWhile it can be somewhat dizzying to look at each home buying expense laid out individually, your mortgage lender should be able to provide a fairly accurate estimate of your total monthly expenditures during the pre-approval process, so you can proceed with confidence before going in on a contract. With the right knowledge and financial plan in place, owning a home - and making it your own - will be well worth the cost.\n\n\n\nInterested in buying or selling a home? We would love to help!\n\n\n\nGive us a call at 855-205-0599\n\n\n\n\n\nBe Prepared for These Closing Costs When Buying a HomeYour Guide to Understanding Closing CostsYour Step-by-Step Mortgage GuideInsurance: What Coverage Is Important?