By: Cassie Kreitner
Go from offer to close on your dream home without any financial surprises.
As a first-time home buyer, it's easy to feel overwhelmed. After all, it's probably the most expensive purchase you'll ever make—one that comes with a lot of complicated financial steps. (But still: so worth it in the end!) While you know you have to come up with a down payment, the up-front costs don't end there. In fact, once you have an accepted offer, it opens up a Pandora's box of additional required—and often, non-negotiable—fees that can total well into the five figures. Below, seven costs that will hit your bank account the hardest, and what you can do to soften the blow. And remember that Fifth Third Bank can help you meet your savings goals.
1. Your Mortgage Rate
Most home buyers require financing to cover at least 80 percent of the sale price, and there are a lot of mortgage lenders out there to choose from. Crunch the numbers to see what you can afford, then take your time researching the different loan types and interest rates to find the one that's best for you and your financial situation.
Why you should price compare: What can seem like a nominal difference between mortgage rates now—we're talking tenths of a percentage point—can cost you thousands of dollars over the life of a typical 30-year fixed-rate loan. Rates are publicly available online, but you should also consider mortgage points (aka discount points) if you plan to stay in your home for many years. Basically, you'll pay more money up front at closing in exchange for a break on your interest rate.
2. Appraisal Fee
Your mortgage lender won't just take the seller's word that the home you're interested in is worth what you're offering to pay for it. Before the mortgage can be finalized, the bank will arrange for an independent certified appraiser to assess the home's property value and judge it against comparable recent home sales in the area. Ideally, the amount you'll see in the appraiser's report will be higher than your accepted offer—the sign of an investment that will likely pay off in the future.
What it will cost you: The price tag will vary depending on your location and the size of the home, but $300 to $700 is a safe amount to budget.
3. Home Inspection
Hiring a certified home inspector to examine the interior and exterior (think: roof, basement, heating and water system, air conditioning, plumbing, electric, and foundation) is an optional yet worthwhile expense. These pros specialize in uncovering issues the average person wouldn't notice or even know to look for, like potential fire risks and safety hazards, structures that aren't up to code, or building materials that are no longer recommended.
Why it's worth it: Spending $200 to $500 on this walk-through can save you from extremely costly repairs later on. If any problems come to light in the report, you can try to negotiate for these repairs to be made before the sale is completed—at the seller's expense.
4. Closing Costs
Closing costs—the associated charges for things like underwriting, document processing and other closing fees needed to finalize your loan agreement—can often end up being 2 to 5 percent of the home purchase price. (And even if mortgage rates are similar at two different firms, these costs can vary quite a bit.) You'll also need to account for attorney fees and homeowners association fees if you're moving into a community that has one.
What may be negotiable: Ask your lender for a loan estimate report that will itemize the charges from the bank and other required services that are needed in order to close. Although many of the third-party fees, like a credit report, are set in stone, you can ask if there's any wiggle room on some of the application or processing fees, particularly if it's a bank or lender you already have accounts with.
5. Property Taxes
There are a lot of expenses that come with homeownership, and property tax is one of the bigger ones. The amount you'll pay depends on your property value and the area where you're buying—keep in mind the tax rate can vary a lot even between neighboring towns. So make sure to look for this number on any real estate listing.
What to keep in mind: Unlike a fixed-rate mortgage payment, your property taxes aren't guaranteed to stay the same year-to-year. Save room in your monthly budget to offset potential annual increases.
6. Home Insurance
Insurance to protect your home is recommended regardless of whether you're a renter or an owner, but most mortgage lenders typically require it to complete your loan agreement. Plus, depending on where your home is located, your lender may also require additional insurance for flooding, earthquakes or hurricanes.
What to look for: Like mortgage rates, it pays to shop around since homeowner insurance policies can vary in what they cover and how much they'll cost. Look for a comprehensive plan that makes you comfortable, and ask about discounts if you combine it with your auto and life insurance policies.
7. Escrow Account and Mortgage Insurance
If you're putting down less than 20 percent for your down payment, most lenders will require you to open an escrow account and get mortgage insurance to protect them in case you default on your loan. You'll deposit monthly payments into the escrow account to cover your mortgage, plus property tax and insurance premiums; the bank then takes out the mortgage payment and pays the taxes and insurance for you. As for mortgage insurance, the amount you'll have to pay (and when) depends on the type of loan you get, so be sure to ask your lender about what to expect.
What to budget for: While the escrow account is no additional cost to you, many states require banks to keep a minimum balance equal to two monthly escrow payments, so you'll need to have that money up front. Using a mortgage calculator to determine your estimated monthly payments is a great start, but only takes you so far: You'll also need to find out how much your homeowners insurance and property tax will be for the year, then divide them by 12. That number combined with your monthly mortgage payment is what you're actually required to shell out each month.
The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank. Member FDIC, Equal Housing Lender
The Nest and Fifth Third Bank present Life Made Better, a sponsored series featuring financial advice and budgeting tips for couples. Visit 53.com/better to learn how its services can help make your life even better.