If you are buying a home in Massachusetts or Rhode Island, you will want to know about all the money you will be spending in order to make it to the end goal of homeownership. Oftentimes buyers will come to me without a pre-approval or even speaking with a mortgage person, so they have zero information on what it will cost to buy a home, if they are in the right price range, etc. So I had my trusty side kick mortgage man write up this explanation. Should you have any questions, you can also reach him directly.
The 3 Costs Associated with Financing Your Home Purchase
Purchasing a home is often times a consumer’s largest financial transaction and one which they should enter into with confidence and full understanding loan programs at their disposal as well as the costs and details associated with them.
In this article I would like to discuss and outline the 3 general costs associated with the financing of a residential property or as I like to call it…Your Future Home.
- Down Payment:
Often referred to as “Skin in the Game”, the minimum required down payment will vary based on the loan product, property type and occupancy status amongst other factors however for the sake of making a clean and easily enjoyed article I will reference one specific example.
Below represents the minimum down payment requirements for an Owner Occupied (primary residence) Single Family Home for a 1st time homebuyer;
Conventional Financing: 3% of Purchase Price
FHA Financing: 3.5% of Purchase Price
USDA Financing: 0% Down
VA Financing: 0% Down
- Pre-Paid Items & Escrow Reserves
Each individual home has its own specific expenses such as property taxes and homeowners insurance, please note that depending on its geographic location flood insurance may also be required. These expenses, because the home is new to you, will need to be paid for in advance and funds must also be set aside for future payment as these become due.
Average Cost: 1 – 2% of your purchase price (varies based on property specific expenses)
Also known as “Property Related Expenses” they can easily be broken into 3 categories;
- Pre-payment of property related expenses;
- 12 months Homeowners Insurance Premium
Discussion: your mortgage lender will require that the property is adequately insured from the moment you close and take ownership. They will require the entire annual premium to be paid at close
- Formation of an Escrow Account (reserves) for future payment of property related expenses;
- 2 months of homeowners insurance premium
- 3-5 months of Property Taxes (varies depending on State, County and time of the year)
Discussion: your mortgage lender will require that you establish an escrow account to pay for future property related expenses. This escrow or reserve account ensures that you will have the funds available when the next bill cycle becomes due.
- Interest Per Diem;
- Interest per diem is based on the amount borrowed and rate received.
Discussion: A consumer will begin paying interest on their mortgage loan from the moment they borrow the money (or close on their home) to the end of the month in which they close.
- Closing Costs
Closing costs cover the fees for the vendors and companies that play a role and assist you in securing the financing of your new home. I often refer to closing costs as “The Cookie Jar” meaning that everyone has a hand in them. The total cost will vary based on the size of your loan and the vendors you have chosen to work with. I have outlined some of the standard fees that you will find in your closing costs below;
Average Cost: 1 – 3% of your purchase price (varies based on loan size)
- Loan Origination Charges
- These are standard lender related fees. The total amount can vary depending on whether or not you are paying a discount point or points for the interest rate chosen
- Appraisal Fee
- This is the fee charged by the appraiser to perform his/her services
- Credit Report Fee
- This is a fee charged by the credit services company to obtain your report from all 3 credit bureaus
- Flood Certification
- This is a fee to receive confirmation of whether or not your new home is located in a flood zone
- Attorney Fee
- This is the fee from the closing attorney to facilitate your closing
- Title Examination Fee
- This is a fee from the closing attorney to review and confirm the title to your new home will be clear and void of clouds when you take ownership
- Title Insurance (Owner & Lender Policies)
- Title insurance protects the respective holder’s interest in the title to the home. Owner’s policies are optional but lenders are mandatory.
Purchasing real estate whether it be your first or fifth time is a transaction that you should enter into with eyes wide open and choosing the right professionals to assist you in this journey is paramount. I have been blessed in my career to surround myself with whom I consider the very best at their prospective role and welcome you to contact me and my team to help Guide You Home.
Content submitted by;
Sr. Mortgage Advisor, NMLS #397424
Province Mortgage Associates, Inc., NMLS #2861
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