One of the biggest surprises when purchasing a home on a mortgage is the amount of money you are required to have on hand. While most people save up for the down payment, the other costs can really take you by surprise if you aren’t prepared for it. So, let’s take a look at what expenses you’ll need to save up for when purchasing a home:
Down payment costs: The down payment on your home can vary between 3% to 20% of the purchase price of the home, based on what type of loan you take. This cost is usually the most obvious since it’s a definite percentage of the property’s purchase price.
Closing costs: Closing costs usually come up to 2%-3% of the loan amount. Keep in mind that the closing costs will vary from lender to lender and state to state. If the closing cost is too high, you may be able to reduce it by either paying a higher interest rate or asking your lender to cover your closing costs. However, not all lenders will be willing to reduce or cover your closing costs.
Additional cash reserves: Apart from the down payment and closing costs, lenders like to know that you have some additional savings in your account that you can dip into to make your monthly payments in case you lose your job. You’ll also need to prove that you have enough money to pay for homeowners insurance, real estate taxes, etc. So, if your monthly mortgage payment comes up to $2,500, it’s a good idea to have at least $5,000 in savings.
Utility adjustments: Utility costs usually refer to the expenses that are covered by the property seller before the closing. For instance, if your property seller has paid a homeowner’s association fee for the whole lear and you close on the home in July of the same year, you’ll need to repay the seller the fees for the remaining months.
In the excitement of looking for your dream home, it’s easy to forget that lenders may require you to have savings for expenses other than the down payment. That’s why it’s important to come up with a total budget that you are willing to spend for a new home and save up for it before applying for a mortgage.
