Buying a home is a major part of The American Dream, but what does it cost to buy a house? Home ownership still ranks at the top of the list among all age groups, from millennials to baby boomers and everyone in between, as an essential part of — The American Dream. In recent surveys across all age groups, owning a home ranked as the #1 Life Goal of 77 to 83% of Americans.
By the time you finish this post you will have answers to all the most frequently asked questions — FAQs — about What It Costs To Buy A House. Here we will also dispel the most common misinformation about the Down Payment, Private Mortgage Insurance (PMI) and Closing Costs.
What Are The Costs When Buying A House?
There are two groups of costs when buying a home — the DOWN PAYMENT and the CLOSING COSTS. Let's begin with the Down Payment and some of the most widely held fallacies regarding it, and why this incorrect information exists.
How Much Of A Down Payment Do You Need To Buy A House?
In a survey, renters were asked what the biggest obstacle stopping them from buying a house of their own was. They listed Saving For The Down Payment or Having Enough Money To Put Down as their biggest impediment to home ownership. These same renters, however, are mostly confused about how much money is actually required to put down on a house. It's not their fault, or yours either; if you read most of the information online regarding down payments to buy a house you'll likely read things that suggest or outright tell you that you MUST have 20% 10% 5% or 3% as a down payment saved before you can buy a house. This is completely FALSE! The truth is...
TAKE AWAY: Low and ZERO Down Payment Mortgages Exist.
So why do you read so many posts from real estate agents and lenders that tell you otherwise? There are a number of reasons for this:
- Many real estate agents are part time and may not know everything you hope they do.
- Different lenders have different mortgage options, and some may not offer nothing-down loans.
- Times change, and when money gets tighter Zero Down Mortgages disappear from lenders' options.
- Some agents only work with one or a few lenders, rather than looking for the best variety of options for their buyer- agent clients.
All this boils down to a lot of misinformation and confusion for renters, or even experienced home owners
TAKE AWAY: Not Everyone In Real Estate Is As Knowledgeable As They Should Be.
Do Zero Down Payment Mortgages Cost More?
The more money you put down on your house the more secure the mortgage appears, and so the bank charges a lower interest rate. How much more will vary with the lender, the current market environment, and your credit score. Worried your credit score is too low? Here's how to get your score up quickly to buy a house: ... but currently the difference I see here is about one-half percent higher (0.5%) more on a fixed rate 30 year mortgage.
DON'T BELIEVE THE HIGH CREDIT SCORES ARE REQUIRED MYTHS EITHER!
Many times you will hear or read that you MUST have a great credit score before you will be able to buy a home. Well that is just not true at all. While while having a higher credit score will give you more options and possibly a lower rate on your loan, having a lower or even what is considered a low credit score will not prevent you from qualifying for a mortgage or from owning your own home for more on what credit score you need to buy a home in the Northern Virginia region or elsewhere in the country read more of the Truth About Credit Scores and Home Buying HERE
How Much Will This Option Cost You Per Month?
Let's assume you buy a house for $400,000. This would count as a moderately priced home for the Northern Virginia metro area. The difference per month to your P&I payment (Principal & Interest) would work out to approximately $117.08 per month, or $1404.96 per year. But does going with the nothing down loan actually cost you, or will it save you money? Let's take a closer look at one scenario...
What Is The Cost Of Waiting A Year To Buy A House?
If you purchased a $400,000 home in April of 2018, in April 2019 that same home might cost about $423,880 — a difference of nearly $24,000 in one year. These figures are based on the year over year average home sale price for the Northern Virginia region, as market reports from the NVAR Northern Virginia Association of Realtors indicate that the average sale price during that time rose by 5.97%. Even if home prices rise by only 3% per year on average, next April the $400,000 house today will be worth $412,000. So if we use the above example or the more modest example here either way you gain MANY times more in just one year's time by NOT WAITING added increase to your net worth of more than $10,000.00 to more than $20,000.00 even after accounting for a slightly higher cost of using Nothing Down Mortgage option you will be much better off.
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What Is PMI?
Private Mortgage Insurance, or PMI, protects the Lender in the event of a default on a mortgage where the loan amount is greater than 80% of the home's value. PMI is added to your monthly mortgage payment. Please note that this does NOT protect you, the borrower; it protects the lender.
You will frequently see articles that list PMI as the major reason that potential home buyers want to put down at least 20% — because when you put down 20% or more there is no need for PMI. While this is true, there are a wide variety of methods you can use to avoid PMI, even when putting down no money at all. The most direct and easy to understand is paying a higher interest rate.
Paying a higher interest rate instead of paying PMI might sound like a six of one and a half a dozen of the other choice, but for many people it could actually be the best choice, and also not have as high a net cost to the home buyer as PMI would. Why? First of all, PMI vs. the Higher Interest Rate is rarely a one for one trade off. Paying the higher interest rate May Be Cheaper. Additionally, PMI is not tax deductible, but the interest on most mortgages usually is. (You'll want to discuss the tax implications with a tax professional).
TAKE AWAY: When Putting Down Less Than 20% PMI Is Still Avoidable!
What Are Closing Costs?
Closing Costs are all the costs accounted for during the home buying process, and they are itemized on the settlement sheet. Most of these costs are paid at the time of closing on your new home; however, some costs are paid prior to closing. These items are called Paid Outside Closing, or POC for short.
Below is a partial list of some of the closing costs you may encounter when buying your home. It is not intended to be complete, and some items listed may not be present in your case.
- Processing fee
- Underwriting fee
- Wire transfer
- Tax service
- Flood certification
- Title insurance
- Settlement fee
- Courier fee
- Administrative Fee
- Property tax reserves
POC Items (Paid Outside Closing):
- 1 year homeowner’s insurance policy
- Credit report
- Home inspection
- Credit report
How Much Can You Expect To Need For Closing Costs?
This will vary with your lender, settlement company, buyer's agent, home inspector, etc., etc. But in Northern Virginia, what we typically see is that this amount will be fairly close to 2 1/2 to 3% of the sales price of the home. Good news though — you can negotiate with the home seller to pay some or possibly all of your closing costs for you at settlement.
TAKE AWAY: Closing Costs Typically Are about 2.5% - 3% Of The Purchase Price Of The Home. The Seller Might Be Able To Pay These For You.
Next time you see or hear someone say they can't buy a house because they don't have enough money, you can set the record straight for them.
- Low and no down payment mortgages are available.
- Even with zero down loans you can avoid paying Private Mortgage Insurance — PMI.
- The cost of waiting a year could easily cost you much more than buying sooner.
- Your Closing Costs can be paid by the home seller in most cases.
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What Are The Non-Financial Benefits Of Buying A Home Sooner Rather Than Later?
The financial benefits of owning a home are often discussed and well known: Tax Benefits, Appreciation and Equity Build Up usually top the lists. But as important as these benefits are to you and your family's financial future, the non-financial benefits might be even more significant and meaningful to you.
Owning a home adds to your sense of security, stability and well being. When you rent, there are so many unknowns that are completely outside your control. Will the landlord renew your lease? Will the landlord repair things well and quickly? Will the landlord sell the property or hire new management that might be worse? Will the property be converted to condominiums... etc., etc., etc. These are just a few of the unknowns that lead to stress and unstable feelings when you rent.
- Control of your living space
One of the first things people do when they buy a home is to make alterations to it — everything from choosing their favorite paint pallet to renovating — remodeling part of their home space to make it uniquely theirs. This is one of the great personal joys home owners relish, in that renters have no control of and are stuck with whatever the landlord chooses — usually the cheapest and least attractive options.
- Privacy & Security
Renters are regularly confronted with intrusions on their privacy and security. Landlords, with short notice, will turn off utilities (to do repairs), schedule inspections, do pest treatments or routine maintenance. These often happen during times when you aren't home and don't really know who is entering your place. As a homeowner, you control who and when someone enters.
Four Legged Friends
While some renters do have the option of having a dog, cat or something more exotic, this option comes with a price — in the form of security deposits and pet rent. In the Northern Virginia area this surcharge for having a pet ranges from about $35 to $75 or more per month per pet. When choosing a place to live, Dogs rank higher than babies or marriage; Many people rank the needs of their pets over consideration for their spouse or their children. Home owners can put this pet rent to other uses maybe even using it to spoil their four legged friends.
Health, Happiness & Academic Achievement
Children of homeowners perform better in school and are content socially, regardless of family income or education levels. Both children and other family members report that they are generally happier and healthier than non-owners, after filtering for factors such as income and education levels.
Sense of Accomplishment
Owning a home of your own is at the top of the list of people across all generations. It's the most substantial investment most people ever make, and along with the financial benefits comes something just as, if not more, meaningful — realizing that all your hard work is paying off; you know you're getting somewhere.
Home owners report being more active and involved in their communities and neighborhoods than their counterparts who rent. This benefits both the area as well as the homeowner. The community is made better for the homeowner's participation. Beyond the financial benefits of a stronger community, involved homeowners report they feel a stronger sense of being a part of where they live.
Peace of mind
In Alexandria, Arlington, Fairfax or anywhere else in the Northern Virginia region rents go up frequently and quickly. Many landlords subscribe to data services that update them daily as to available homes. They use this information to alter the rent they charge to new tenants on a DAILY basis. Additionally, landlords, because of their current business models, actually charge HIGHER rents to renewing tenants than they do to new tenants. That's right — your landlord is probably penalizing you for being a returning customer. Doesn't seem fair, does it?
Pride of ownership
There's no place like home. Many former renters will say things like "When I was renting it was a place to live...now that I own my own place it's the place I call home." Are you ready to find your next home? Get in touch and let's talk about it. No matter how near or far off your plans seem to be now I'll be happy to schedule a No Cost, No Obligation phone call with you to help you get started. CALL or EMAIL to schedule a chat.
Before you talk to a lender, look at an open house, or go to look at new construction homes, make sure the very first thing you do is to select a knowledgeable, experienced and professional Buyer's Agent to represent you, and not just guide you through the process, but negotiate the best possible price and terms for you. Remember, a buyer agent is the ONLY part of your home buying team that is actually working in your best interest.
"Down Payment MYTHS — What Does It Cost To Buy A House?"
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