You’ve been saving money to buy a home.
But is it enough?
Believe it or not, you can over-save for a property.
With inflation and housing prices as they are, you could save infinitely for a 20% down payment and never actually reach that amount.
So, how much does it cost to buy a home?
How Much Does It Cost to Buy a House?
The cost of buying a home can vary greatly depending on many factors, such as the property’s location, size, and the type of home you are looking for.
But there are generally a few things you need to think about:
- Your down payment.
- Financing and closing costs.
- Moving costs/associated costs.
Many potential home buyers get tripped up by thinking that they need to save more money than they do. But, of course, the inverse can happen too; you could try to enter the market with less money than you need.
First: How Much is a Home in Your Market?
Before calculating your down or monthly mortgage payment, you need to know what homes are selling for in your market.
This number can be greatly affected by location, the size of the home, and the type of housing market you’re in.
If you want to buy a house in a rural area, it will likely cost less than buying a comparable house in an urban center.
The closer you get to a major city, the pricier home values will be.
The size of the home you’re interested in will also affect its cost. A small starter home will cost less than a large family home. But per square foot, you’ll often see starter homes going at higher rates than bigger homes.
The type of housing market can also affect prices. In a seller’s market, where more buyers than homes are available, prices will be bid up.
Conversely, prices will be driven down in a buyer’s market (which we probably won’t see for some time), where more homes are available than buyers.
All these factors affect how much a home costs, so it’s important to understand the market you’re buying into. You must also consider extraneous factors such as property tax, HOA fees, and raw home prices.
You’ve looked around and want a $300,000 starter home.
How Much Should You Save for a Down Payment?
The down payment is the lump sum of cash you must bring when you sign on the dotted line.
This number can range anywhere from 3% to 20% of the purchase price, depending on the type of loan you’re getting and other factors.
Most people don’t have the full 20% down these days.
The median down payment for all buyers last year was just 10%, according to the National Association of Realtors. But that comes at a cost, too: mortgage insurance. Until you’ve paid 20% of your home’s equity, you’ll have to pay mortgage insurance (an additional monthly fee). And that will increase the monthly payment on your home loan.
So, let’s go back to that $300,000 starter home. 3% down would be $9,000, and 10% down would be $30,000.
How Much Do You Need for Closing Costs?
Closing costs are the fees and expenses associated with finalizing your home purchase.
They can range from 2% to 5% of the purchase price and usually must be paid in cash at closing. They vary based on the lender, so a home buyer should get quotes from multiple lenders.
This means that on a $300,000 home, you could look at closing costs of anywhere from $6,000 to $15,000.
These costs can include things like:
- The loan origination fee (this is the fee charged by the lender for processing your loan)
- The appraisal fee
- The home inspection fee
- The title search and title insurance fees
Before your house closes, your lender will tell you exactly how much money you must bring in. This will constitute your closing costs and your down payment. Usually, the only things paid for in advance (in that list) are the appraisal and home inspection.
What Other Costs Should You Plan For When Buying a House?
In addition to your down payment and closing costs, there are a few other things you need to think about when budgeting for your home purchase.
If you’re selling a home at the same time that you’re buying, you’ll need to factor in the cost of hiring a real estate agent and any repairs or renovations needed to get your home ready for sale.
However, if you’re moving from out of state, you’ll need to factor in the cost of hiring a moving company.
A lot of this may not strictly apply if you are building a new home; the costs of purchasing a new home vary tremendously from purchasing an existing home.
When considering general affordability, you must also account for homeowners insurance, property taxes, and utility bills. And, of course, you should also budget for general home maintenance.
Earnest Money: The Cash You Need Before Close
Another factor you might want to consider is earnest money because you’ll need it fairly early in the home-buying process. The earnest money deposit is the cash you’ll need to come up with to seal the deal on your new home. You provide this when you make the offer.
This money goes into escrow when you make an offer on a house, typically 1% to 5% of the total purchase price.
Our $300,000 starter home would be $3,000 to $15,000.
You need this cash because it shows the seller that you’re serious about buying their home and helps offset some of their holding costs while the deal is being finalized.
If everything goes smoothly, the earnest money deposit will go towards your down payment when you close on the home.
But, if something goes wrong and you back out of the deal, you might not get your earnest money deposit back.
It all depends on the contract you sign with the seller and what contingencies are included.
In very competitive markets, earnest money has become very significant.
How Can You Find Out How Much Buying a House Will Cost?
As you can see, there are a lot of variabilities involved. Your down payment could be 3% to 20%. Your closing costs could range from 2% to 5%.
And there are a lot of other potential costs to consider as well.
The best way to budget for your home purchase is to talk to a lender and get a good idea of what you can afford.
They’ll be able to give you an estimate of your monthly payments, as well as how much money you’ll need up front for things like your down payment and closing costs.
Once you have that information, you can create a realistic home purchase budget. Your realtor can work with you to find a house you can afford.
How Much Do People Spend on a First Home?
The median price for a first home was around $150,000 to $200,000. This is generally considered affordable for a “starter home,” but it gets skewed based on local markets.
Today, many people purchase more expensive homes later in life. A $150,000 starter home is what people expected to buy in their early 20s, but now it’s more common that someone will buy their first home in their 30s or 40s.
Even in very hot markets, it’s usually possible to find a starter home (although it may not be within that range). But that starter home might end up being a “starter condo.”
A better rule of thumb for “how much someone should spend on their first home” would be that they shouldn’t spend much more than they already spend on rent. If you’re paying $1,500 in rent, look for a house with approximately a $1,500 monthly payment (which includes mortgage, property taxes, insurance, etc).
How Long Will You Keep Your Home?
Another factor when it comes to costs is how long you’ll keep your home. You lose much more money if you don’t hold a property for a few years.
That’s because it costs money to sell a house. If you keep the house for a few years, the equity you build can offset the sale cost. If you churn your house fast, you’ll spend more in the long run.
Here’s a quick example:
You purchase a home for $250,000 with a 20% down payment of $50,000. After two years, you sell the house for $275,000. You’ve made $25,000 on the sale of the house. But after accounting for commissions and other selling costs, you’re only left with $20,000.
If you had kept the house for five years, you could have sold it for $300,000. After accounting for selling costs, you would have made $40,000.
So even though it might cost more to keep a property longer, it usually pays off.
Do Some Mortgage Loans Cost Less Than Others?
Absolutely. There are a few factors.
Just because you’re approved for a $300,000 loan doesn’t mean that’s what your payment will be. The actual amount you’ll need to finance will depend on the interest rate of your loan and the length of the loan term.
A higher interest rate will mean a higher monthly payment. And a longer loan term (say, 30 years instead of 15) will also result in a higher monthly payment.
You can use an online mortgage calculator to estimate your monthly payments for different loan amounts, interest rates, and loan terms.
So, your mortgage lender and your mortgage interest matter.
Your lending product also matters. For example, an FHA loan will have a different interest rate and monthly payment than a conventional loan. An FHA loan may require 3% down, a USDA loan may require 0% down, and a conventional loan may require 10% to 20% down.
Closing costs also matter. Some lenders offer “no closing cost” or “low closing cost” options, but those usually have a higher interest rate.
So, there are lots of factors that will affect how much your loan costs. The best thing you can do is talk to a few different lenders and compare their offers.
Your Mortgage Payment: Is It Cheaper to Rent or Buy?
In reality, a lot of people don’t think in terms of a lump sum. When they think about affordability, they think about their mortgage payment and how much they’ll spend monthly.
It depends on the market you’re in and your circumstances.
The biggest factor is usually the interest rate. In a low-interest environment, buying is usually cheaper because you can get a lower monthly payment.
In a high-interest environment, renting is usually cheaper because you don’t have to worry about building equity in a property that may not be worth as much as you paid.
Of course, there are other factors to consider, like whether you’re eligible for a first-time homebuyer program or down payment assistance.
Buying a house isn’t always a financial decision. For many, it’s about lifestyle. If you’ll be in a place for more than a few years and want to settle into your property (without worrying about rent increases or eviction), then buying a house can deliver peace of mind.
On the other hand, buying a house could be more expensive if you already plan on moving in a few years and you’re comfortable paying rent.
Buying a house is a major financial decision. Consider many things when figuring out how much it will cost you.
Your down payment, closing costs, and other associated expenses vary considerably. The best way to understand what you can expect is to talk to a lender and a real estate agent before making any assumptions.
The size of your down payment will depend on the type of loan you’re getting and other factors. Most people don’t have the full 20% down these days. Don’t assume you can’t buy a house because you don’t have a hefty down payment.
Closing costs are the fees and expenses associated with finalizing your home purchase. They can range from 2% to 5% of the purchase price and usually must be paid in cash at closing.
This depends on your market. Your real estate agent can run comparables on your area and tell you how much people spend on the houses you like. You can then decide whether this will be affordable for you.