02.15.2021By Madeline Daniels
Homeownership is considered a huge part of the “American Dream.” With Real Estate being one path to acquiring wealth, it’s something we all consider. When making the decision to buy a home you have to think beyond the purchase price of the home. There are many factors that contribute to how much you’ll *actually* be paying for your home over the life of the loan and beyond.
Here are a list of unexpected costs associated with buying a home:
- INTEREST
Like every loan, you will pay interest on your mortgage. How much interest will be influenced by the rates when you buy (which you cannot control) and your credit score (which you can mostly control).Your credit score impacts your mortgage interest rate and how much you will need for a down payment with certain loan programs. If your score isn’t great, you might not even be approved for a home loan.
You can check your credit report at annualcreditreport.com, or by contacting one of the three credit bureaus: Equifax, Experian, or TransUnion. But if you find you fall into the lower range of credit scores, it is not the end of the world. Check out these tips for improving your credit score from Tom Quinn, Vice President of Scores at FICO.
- DOWN PAYMENT AND PRIVATE MORTGAGE INSURANCE
The more you put down on your new home, the better. In recent history, the down payment goal was ideally 20% of the purchase price. This is because you’re considered a lower risk to the lender by having a significant amount of your own money invested in the property. As a result of a larger down payment, you will receive a better interest rate, have lower monthly payments, and you will not have to pay for private mortgage insurance, or PMI.
PMI is a type of insurance that lenders require you to pay if you are unable to make a full 20 percent down payment on a Conventional Mortgage Loan. This protects the Lender in the event you default on your loan— and it’s not cheap. PMI can cost up to about 2 percent of the total loan amount. PMI is either required to be paid up front, or rolled into your monthly mortgage payment.
With some loans, you won’t have to pay PMI forever, but check with your lender for more details.
If you do not have a 20 percent down payment, there are alternative options, such as government programs that require just 3.5 percent down payments, USDA loan programs, and VA Home Loans. Each of these, along with other programs with less than 20 percent down payments have certain criteria and guidelines that you must meet to qualify, like income levels, and the area in which you buy your home.
- CLOSING COSTS
Closing costs include things like title insurance, appraisals, and attorney fees. Plan on these closings costs being anywhere from 3 to 7 percent of the total loan amount. And remember, this is on top of the down payment.
In some housing markets it is customary for the seller to contribute towards the buyer’s closing costs. Be sure to talk to your Real Estate agent about negotiating in this area to help mitigate costs.
- HOMEOWNERS INSURANCE AND PROPERTY TAXES
While you’ll secure your property insurance and know the current tax bill for your property, it is possible for both of these expenses to increase. Be prepared!
In many cases buyers choose to add an “escrow” account to their mortgage, which allows you to contribute towards your homeowners insurance and taxes with each mortgage payment. The Lender then pays the bills from your escrow account as they become due.
While it is a fabulous arrangement, creating an escrow account on top of your mortgage can cost hundreds of dollars to your monthly mortgage amount.
- MAINTENANCE AND UPKEEP
Homeownership will come with some unexpected expenses. These increases could be energy costs, the price of new appliances, homeowner’s association fees, or even just the expense of maintaining your yard. So make sure you’ve accounted for all these in your budget. And for good measure, start an emergency fund for those things you cannot prepare for. Learn more by reading How To Start Your Savings Journey
Are you saving for a home? Let America Saves help you reach your goals. It all starts when you make a commitment to yourself to save. Take the first step today and take the America Saves pledge to save money, reduce debt, and build wealth over time. America Saves will become your savings accountability party, sending you information, advice, tips, and reminders about saving for a home to help you reach your savings goal.
Resources:
- America Saves has some great one minute videos with good tips: https://americasaves.org/for-savers/national-homeownership-month/ or https://www.youtube.com/watch?v=q3HLXnteEvQ&list=PLBGUy38N_Pt2VC0rsbRBKvV-yjpsVVKM_
- Steps to Homeownership: Download America-saves-homeowner-checklist Download MDPA-10-Steps-to-Homeownership
- Local down payment programs: Download Home Purchase Resources Boulder County
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From Elevation Community Land Trust: Download Doors to Opportunity Download Property Criteria for Doors Download Down-Payment-Assistance-by County
Comparison of new programs Doors to Opportunity, FirstBank PATH Program, Metro DPA Social Equity Program: Download Doors Social Equity Program Comps (1) (1)
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MetroDPA program: Download MetroDPA_DPA_Flyer_0621 Download MDPA - What Is It
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FirstMid Bank: MidFirst Home Loan Grant Program Download MidFirst Home Loan Grant Program
ABOUT THE PERSONAL INVESTMENT ENTERPRISE (PIE) PROGRAM
The Personal Investment Enterprise (PIE) program is a local savings program provided through Community Action Programs of Boulder County and Mile High United Way. The program is designed for low-income families to enroll in financial literacy classes and save through a matched saving account at a rate of 4 to 1. The first step in applying to the program is to attend an orientation meeting with Community Action Programs at Boulder County. They can be reached at 303-441-3998 or at [email protected]. For more information on the PIE program visit https://www.bouldercounty.org/families/community-action-programs/personal-investment-enterprise/ or https://unitedwaydenver.org/personal-investment-enterprise-pie-program/. To see if you qualify, take this survey: https://www.surveymonkey.com/r/PrelimPIE.
