Part 4: Top 8 Questions for Homebuyers That I've Been Asked
Unless you're able to pay cash, buying a home typically will require financing. Financing one of the largest purchases of your life can certainly be intimidating. So understanding how much it truly costs to buy a home is something that will help you answer the most important question of this 8-part series.
There are many costs associated with buying a home or real estate. In addition to the financing costs, homebuyers will have other fees such as closing costs than can total to upwards of 4%-5% of the home purchase price. Finally, never forget that once the home is purchased, there will likely be sporadic maintenance costs.
A mortgage is a type of loan that is used to purchase a home where the buyer (also known as the borrower) agrees to pay the money borrowed back over time with interest.
Homebuyer Cost #1 - Monthly Payment (Principal, Interest, Taxes, & Insurance)
Interest is the fee that the lender charges the borrower in exchange for lending the money in the form of a mortgage. Simply put, interest is the cost of financing your home.
Principal is the balance due on your loan.
When a lender mentions P/I or Principal and Interest payment, they are referring to these two pieces combined.
When financing just about any real estate, especially if it is a house, just like purchasing anything else, there will be taxes. In this case, it's real estate taxes that are also commonly referred to as property taxes. Property tax rates vary by city, county, and state, so be sure to consult with your trusted home loan officer to get a good estimate on how much property taxes are. This is critical because property taxes can range from hundreds of dollars per year to more than $10,000 per year. Property taxes are typically collected from your monthly payment and set aside in an escrow account on your behalf to be paid to the respective municipality upon on tax due date.
In addition to property taxes, lenders will require homeowner's insurance (HOI). This is different than mortgage insurance (MI) and MI will be explained as well. Think of auto insurance, but it's for your home. Homeowner's insurance will protect you and the lender in the event that the home is destroyed. HOI is collected as part of your monthly payment as well.
Calculate your new mortgage payment
Your total monthly payment of principal, interest, taxes, and insurance (PITI) may also include mortgage insurance. Mortgage insurance is an additional fee that a lender may charge, to minimize their risk for carrying the mortgage in the event that the homebuyer is unable to make the payments. Most homes will not have equity when buying them unless the homebuyer makes a down payment.
Unless the homebuyer is a Veteran or active duty service member using their VA Home Loan Benefit, the lender will typically require a minimum down payment of 20% of the value of the home in order to avoid mortgage insurance.
Amortization is simply the home loan pay off process. When you agree to borrow money for a home, the lender will provide a payment schedule for you. If you have a fixed-rate 30 year mortgage, then the schedule will show 360 months of payments. While the payment amounts will be the same, the breakdown of the payments will shift. As your principal balance decreases over time, the amount of your monthly principal and interest payment will begin to shift.
Homebuyer Cost #2 - Closing Costs
Closing costs are the total fees incurred during the homebuying process. Lenders are required by law to disclose these fees to a homebuyer who is financing with a traditional qualified mortgage. These disclosures are referred as a Loan Estimate and a Closing Disclosure.
When buying a home, various 3rd parties will be involved in the process to ensure that the transaction meets the county and lender's requirements. Each of the various 3rd parties will charge a fee for their services. The total charge for these fees is what makes up the closing costs. Such fees include:
Discount fee (the cost to get a lower interest rate)
Lender fee (the cost for origination, underwriting, processing your loan)
Appraisal fee (the cost for an appraiser to assess the value of the home)
Inspection fee (the cost for a home inspector to inspect the home)
Title Insurance fee (the cost for insurance in case the title company misses a previous lien)
Settlement fee (the cost for title company to close)
Recording fees (the cost for local county to record the transaction)
Prepaids (this is up-front "cushion" for taxes and homeowner's insurance)
Escrows (this includes setting up taxes and insurance balances for future due dates)
Prepaid Interest (the amount if interest per day between closing day and 1st payment due)
The total amount of the closing costs may vary and usually range between 2%-4% of the agreed upon purchase price.
For a VA Home Loan, if the seller is willing, they can contribute up to 4% in seller concessions. For traditional homebuyers using FHA, USDA, or conventional home loan financing, seller's have the option to cover the buyer's closing costs as well.
However, if the seller is not willing to cover the buyer's closing costs, then it will be the responsibility of the homebuyer to pay for their own closing costs. Closing costs cannot be rolled into the loan and homebuyers cannot use a credit card to pay for closing costs. Lenders and title companies will verify that the money used to cover the closing costs comes from the homebuyer's verified checking account.
Homebuyer Cost #3 - Home Maintenance
Owning a piece of good old-fashioned American real estate is an opportunity to own a piece of the land that so many have fought for, while building wealth over time as the home appreciates. However, nothing lasts forever! Whether it's replacing the roof, having a water leak, having a furnace that goes bad, it's all part of homeownership. Plan for these things to happen and when they do, you and your family will experience much less stress because of the plan and the money that you have allocated to use for such issues.
So as a homeowner, it's wise to set money aside in savings on a regular basis to cover any maintenance expenses that will inevitably pop up in the future. Verify the age of your home and the remaining expected life remaining of the home's critical components such as the water heater, furnace, roof, appliances, etc... This will better prepare you and your family for planning to address these maintenance challenges in the future. Understanding what it takes to buy a home will make the process much more enjoyable when you make the decision to become your own landlord.
While the costs of homeownership may seem significant, the equity that is built over time through real estate appreciation and home improvements will outweigh the expense and give you the opportunity to build generational wealth for your family.
The answer to question #5: Can I afford it?
If you'd like to learn more about the process or would like to get started today, give me a call or click below.
Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the homebuying process across America.
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
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