How Much Money Will I Need to Buy a House?
How much money will I need to buy a house?
Many of my clients have expressed their confusion with the costs associated with buying a home. Closing costs, down payments, earnest money…it’s a lot of new terminology that we were not taught in school. If you are considering buying a house, I’d suggest talking to a lender first. They will give you a good idea of how much home you can afford and the monthly payment that goes with it. Just because you get approved for a $500,000 home, doesn’t mean you’ll want to pay the monthly payment that goes along with that budget.
THE FOLLOWING COSTS WILL BE DUE BEFORE CLOSE.
Earnest & option money
- Earnest money (usually 1 to 3% of selling price) is provided by the buyer so that the seller takes the offer seriously. You’re using these funds to show the seller you’re earnest about buying their house. Don’t confuse this with the down payment on the house. They are two separate things. The earnest money check is turned into the title company, who will hold it in an escrow account. You will lose the earnest money if you breach the contract. Otherwise, this is a deposit, and you will get it back, or it can be applied to your down payment amount at closing.
- Option money, unlike the earnest money, is cash you won’t get back. But the option check is less money—typically around $100-$300. The option period, buys you time to have home inspections done and negotiate any final terms or repairs with the seller. For example, if you have a six-day option period written in the contract, you’ll have six days to have your inspection completed, come up with repairs you want, and make negotiations with the seller.You have 48 hours to turn in earnest and option money checks once you go under contract.
The cost is usually between $290-$450 depending on the size and age of your home. As soon as your offer is accepted, you should schedule an inspection. Your real estate agent will assist you with this process. The inspection should be completed within your option period, so there will be time to make further negotiations. Remember, in Austin, the option period is usually between 5-7 days. Inspections can last a few hours, but I always encourage my buyers to come at the end so the inspector can go over the report with you. It’s a great way to start getting to know your home. The inspector is looking for things you may not have noticed before.
THE FOLLOWING COSTS WILL BE DUE ON THE DAY YOU CLOSE. YOUR TITLE COMPANY WILL HELP SET UP CLOSING AND MONEY WIRING.
Cash to close: Cash to close is the amount of money you bring to closing, which includes your down payment, closing costs , and escrows for property taxes and homeowners insurance.
Down payment (3-20% of sale price)
- Example: If you bought a home for $250,000, your down payment could be anywhere from $7,500 to $50,000.
- Your lender will help you decide what makes the most sense for you financially.
Closing costs (2-5% of sale price)
- Prepaids: These are costs associated with your home that need to be paid in advance when getting a loan that will accrue between the closing date and month-end.
- Property Taxes
- Homeowner’s Insurance
- Mortgage Interest
- Other Potential Closing Costs:
- Appraisal Fee
- Credit Report Fee
- Loan Origination Charge
- Title Services & Lender’s Title Insurance Fees
- Owner’s Title Insurance
- Recording Charges
- Wire Transfer Fee
- Prepaid Mortgage Interest
- Property Taxes
- Prorated Taxes
- Homeowners Insurance Reserves
- County Property Tax Reserves
- Monthly Payment
Why do I keep hearing I need a 20% down payment?
When purchasing a property, the majority of the population won’t pay 100% of the sales price in cash and must go through a local lender or bank to borrow money. Buyers then need to consider how much money should be used as a down payment. When I was growing up, my dad always told me it was best to have no less than a 20% down payment. His argument was he didn’t want to pay PMI (Private Mortgage Insurance). That cost is typically 0.5 to 1.0% of the loan amount and is charged to a buyer who puts less than 20% down on their home. So, if your loan amount were $100,000, meaning you’re borrowing $100,000, you would pay at most $1,000 a year extra, for PMI, if you put less than 20% for a down payment. Consider your own situation. Do you want to tie up that much money—a 20% down payment? Or, is that your rainy day fund? Think about how “liquid” you need your cash to be. Paying 3 to 15% down payment may not be so bad! Think of the risk vs. return. Your lender will be the best resource to figure out what’s right for you.