Unlike most things people buy, purchasing a home doesn’t have a straightforward price tag.
When you buy a donut, it’s a clear exchange, and it happens all at once. You don’t need to consider the cost of ingredients, how volatile the milk market is, or what the rent and labor costs are for your local donut shop. Let’s try to simplify the costs of buying a home, divvying up one-time costs, ongoing expenses, and exit costs.
Down payment – For most, a down payment is the biggest cash outlay. Your down payment is cash that is paid at the time of purchase. This is not an “expense,” it’s an investment. It becomes equity in your home.
It is common for borrowers to have 20% of the purchase price available for your down payment, but it is not a requirement. You can purchase a home with as little as 3% down, but these loans generally require mortgage insurance premiums, which lead to a higher monthly payment. At Clara, our minimum down payment amount is 5% of the purchase price.
Closing costs – Unlike your down payment, this is a true expense that is paid when you close your loan. Closing costs can include a number of things, but generally these are the costs associated with things like title and escrow fees, home inspections, appraisals, and the fees your mortgage lender charges for their services. You may or may not be responsible for all of these fees. They are negotiable, and in some cases, the seller may cover some of the costs.
Mortgage payment – When you take out a mortgage, you are essentially choosing to pay for your home over an extended period of time instead of paying all cash up front.
Taxes & insurance – Buying a home comes with some new expenses compared to renting. First, if you have a home loan, you will be required to have a basic homeowners insurance policy. You may also need insurance to protect your home from floods or earthquakes. Depending on which state you live in, you may also have to pay property taxes for your new home.
Everyday expenses – Compared to renting, you may have some new monthly costs that come along with being a homeowner. You will be responsible for all of your utility costs. Depending on where you purchase, you may have to pay homeowners association dues. The costs of maintaining your home are also your responsibility now – everything from yard care to plumbing falls on your plate now.
Before purchasing a home, it is wise to have some money saved specifically for these new maintenance expenses. That way, if your refrigerator breaks down, or a broken pipe floods your bathroom, you will be prepared.
The cost of selling a home – When it comes time for you and your home to part ways, there are a number of things to pay for. The most expensive exit cost is often real estate agent commissions. As the seller, you will generally pay 5-6% of the home value in commissions to both your agent and the buyer’s agent. Depending on the offer you accept, you may also be responsible for some of the closing costs, like inspection fees or a home warranty. To determine the total cost of owning a home, it is important to consider the exit costs.
Is buying a home an investment?
This is a tricky question, but we will do our best to answer it.
When considering your home as an investment, there are a number of ways to look at it. First, you should consider the value of the home, and whether or not it will appreciate or depreciate over time. To get an idea of historical trends, you can check out the Case-Shiller index for home prices. This will let you see prices at the national level as well as prices in 20 major metro areas.
Another consideration is the effect of homeownership on your taxes. Some of your new expenses, like property taxes and mortgage interest rates, can lead to tax deductions.
Potentially the biggest factor to consider is what you would do with your money if you did not purchase your home. Using your cash to purchase a home comes with an opportunity cost. If you would have otherwise paid off your high interest credit cards or student loan debt, that may be a better option as far as a return on your investment goes. On the other hand, if your money is sitting in a savings account, you may decide that owning a home is a better investment opportunity.
This is a highly personal decision, and there are a lot of factors to consider. For more information, we recommend talking with a professional advisor that best meets your specific needs.