There is a myriad of costs associated with buying a home that catches many first time home buyers off guard. To avoid the stress of a mountain of unexpected costs, and having no money left to buy furniture, check out the actual costs of purchasing a home before you start the process.
The down payment
The down payment is the first cash outlay you’ll need to make if you want to buy a home, and it’s the biggest! If you're going to avoid paying private mortgage insurance (PMI), then you’ll be looking at a 20% down payment. For a home of $200,000, the down payment will be $40,000. It’s a hefty sum but doable if you’re focused and disciplined with your savings.
It’s worth aiming for a 20% down payment because the long-term benefits outweigh the sacrifices you may have to make to save that much. For example, you’ll have more equity in your home, pay less in interest and have security if mortgage rates increase.
There are plenty of mortgage alternatives if 20% down is out of reach for your current situation. Working with a trusted real estate agent and lender can help you navigate the best option for you.
Closing costs are the fees that you pay when you close on the sale of a house. In general, you will pay up to 3% of the purchase price when you buy a home, so for a mortgage of $180,000, the closing costs will be $5,400.
In Minnesota, closing costs can include (but are not limited to) things such as:
Mortgage application fees
Credit report fees
Home inspection fees
Pest inspection fees
Homeowner’s insurance premium
It’s important to note that closing costs vary from state to state though, and even from one lender to another. Be sure to be clear on what your closing costs will be when working with your agent.
Prepaid expenses are not a fee per say, but they can still surprise buyers. These are recurring expenses that you’ll have to pay for as a homeowner, and at closing, some of these are due upfront.
Here are some examples of prepaid costs when buying a home:
Interest accrued before your first mortgage payment - try to set your closing date for the end of the month, rather than mid-month to reduce this.
Private mortgage insurance premium - the first month’s PMI is due at closing if you don’t have a 20% down mortgage.
Homeowners insurance - the annual premium needs to be paid at closing.
Real estate tax - you may pay anything between two and 12 months of real estate taxes, depending on where you live and the frequency of tax collections. In Minnesota, property taxes are collected semi-annually on May 15 and October 15.
When you buy someone’s home, you may have to reimburse them for some utility charges they’ve paid for in advance. Usually, this doesn’t amount to more than a few hundred dollars, but they are still other costs of buying a home you need to pay before you move in. Utilities that you might be charged include water, sewerage, garbage removal, and recycling.
You can plan for this by getting a record of the utility bills the current owner pays on average throughout the year via your real estate agent.
The current owner can have also prepaid annual homeowner association fees, so you’ll need to reimburse them for a certain number of months.
Lender-required "cash reserves"
Your lender may also require you to have a certain amount of money in your bank account before you close to ensure you can meet your first couple of mortgage repayments. The amount varies from lender to lender, but the typical amount they need you to verify you have in a checking or savings account is two months.
In sum... (no pun intended!)
This list of costs associated with buying a home isn’t exhaustive; there could be other costs and fees you will need to pay when buying a home in Minnesota.
Although the additional costs of buying a home may be off-putting at first glance, we believe it’s better to know about them beforehand so you can budget for them and complete the sale of your first home.
Always work with your trusted financial and mortgage professionals to help assist you on your home buying journey!