What’s the REAL Cost of Buying a Home?

Many people will tell you that you need 20% of a property’s value as a downpayment, but while this is definitely an advantage, it isn’t strictly true. Home buyers can actually put down as little as 3.5% with a U.S Federal Housing Administration (FHA) loan for a fixed rate mortgage over a 30 year period. Generally, these 3.5% down payments tend to be capped to an upper loan limit of $417,000, but this can vary depending on your location. For example, more expensive areas such as New York and Los Angeles will allow you to borrow more than that amount as part of a FHA loan thanks to the higher average price of property in the city.

That said, you don’t need to go with the FHA for your mortgage if you have less than a 20% downpayment reserved. Standard bank loans of up to $417,000 can also be approved with as little as a 5% downpayment. If you need to borrow more, though, you should expect to be asked to pay an additional 5% of the total loan amount upfront.

What Are The Benefits of Having a 20% Downpayment?

While it may be a relief to learn that it isn’t necessary to have a 20% downpayment, there are still many benefits to be enjoyed if you are able to meet that amount. First of all, you will end up paying less for your home over time if you can put down 20% upfront. If you pay off more of the property value at the beginning, your loan amount will be lower, which means you’ll pay less in interest over the mortgage term.

You are also likely to get a better mortgage interest rate. Lenders will see a 20% down payment as a sign of greater financial stability when compared to someone who only has 5% to put down on their loan. Therefore, those who put down less than 20% are often viewed as a higher credit risk and usually have a higher interest rate on their mortgage.

The same is somewhat true when you place an offer for a property. The unfortunate truth is that sellers usually prefer to deal with buyers who are able to offer a 20% down payment or higher. This may seem strange, but from a sellers perspective, buyers who have a higher down payment are more likely to have a mortgage application approved and thus lead to a sale. Lastly, if you’re able to put down 20% or more, you will not need to pay private mortgage insurance or PMI. This insurance will increase your monthly mortgage payments and can contribute to higher costs over the length of your mortgage term.

This might sound depressing, but don’t lose heart. Most people in the U.S are not in a position to put down 20% when they buy a home. In fact, in 2018, over a quarter of buyers under the age of 37 put down only a 5% down payment when purchasing a property.

Not all lenders will have the same definition of “bad credit.” Some will consider a bad credit score to be anything that is lower than 650, while others are more forgiving and define bad credit as a score below 630.

Just like down payments, the FHA has a more lenient approach to an applicant’s credit score. From their perspective, as long as your credit score is higher than 580, you can put down as little as 3.5% for a down payment. If your credit score is less than this, the FHA will require you to put down a 10% down payment.

If your credit score is towards the lower end of the scale, there are things you can do to raise your score. But, you should definitely be shopping around for the best rates. You may be pleasantly surprised at the variety of rates you are offered across different lenders. After all, even a small reduction in your interest rate will make a big difference to the amount you wind up paying over the course of a standard 30 year mortgage.

What Write-Offs Come With Buying a Home?

One of the benefits of owning your own home is the tax deductions that become available to you. These write-offs can help you to save a lot of money on your yearly tax bill and thus reduce your financial strain. Let’s take a look at the most important write-offs you can take advantage of as a new homeowner:

Mortgage Interest

It should come as no surprise that every mortgage borrower has to pay interest to the lender over the period of the loan. The interest appears as a percentage that is applied to each of your monthly payments. The accumulation of mortgage interest can reach many thousands of dollars over the years, but it is also tax-deductible. Because interest on mortgage repayments reduces your household income, you’ll benefit from a reduction in your tax bill.

At the beginning of every year, usually in January, your mortgage lender will send you a 1098 tax form which details the amount of mortgage interest you have paid over the previous year. You can then claim this amount as a deduction in the section of your tax return marked ‘Schedule A’. Mortgage interest deductions are capped at $750,000 for married couples filing jointly or $375,000 if you are married but submitting your tax returns separately.

Mortgage Points

Sometimes called “loan origination points” or “discount points,” mortgage points are paid to your lender to reduce the overall interest rate on your mortgage loan. Each point accounts for 1% of your mortgage amount.

If you were to buy a $300,000 home, the mortgage lender could charge mortgage points of $3000. Thankfully, these mortgage points are also tax-deductible, but some rules do apply. For example, the mortgage must have been finalized and secured, the amount of points paid cannot be higher than the average for your locality, and your down payment must be more than the value of the points paid.

Aside from the obvious fees involved with buying a home, there are some additional, hidden costs of home ownership to take into consideration. You should factor these into your overall budget when deciding what you are able to afford.

Closing Costs

Once you have settled into your new home, you should expect to invest a percentage of your homes’ value back into the property every year in maintenance. Generally, homeowners will spend around 1.5% of the value of their home on upkeep annually. The sad truth is that property deteriorates over time. Keeping on top of the maintenance will ensure your home holds value and helps you to avoid a much bigger repair bill later.

Every year, you’ll likely need to apply weedkiller, pest-control treatments and give the exterior of your property a good powerwash. Carpets will need to be deep-cleaned and your ventilation systems will require servicing. Every few months you’ll need to change HVAC filters, maintain your yard, and give the guttering a good clean out. This all requires the use of tools which you must either purchase or hire out at a daily rate. You’ll also have seasonal expenses such as insulation fixes and heating system maintenance to consider.

Individually, these upkeep jobs may not be very expensive, but over the course of 12 months they can add up to a noticeable amount. If you are unsure how much you should factor into your budget for maintenance, you can ask your local real estate agent for their advice.

No matter what, if you are buying a home, you must get home insurance. The cost of home insurance will vary by state, but the national average is $1,244 per year when based on a $200,000 home ($1,000 deductible and $300,000 liability). Of course, there is always the chance you could make savings by getting quotes from many different providers.

Furthermore, you can discuss what discounts are on offer based on particular criteria. For example, if you work from home or have a good security system installed, your provider may reduce your premium. It is important to be aware that homeowners insurance has its limitations. If you live in a flood-prone area, for example, you’ll probably need to get separate flood insurance coverage. Also, condominiums may require you to have an additional liability rider to cover any damage or accidents that occur on the property.

Taxes

Commuting

Buying a property in the city will be more expensive, but you may also find that the money you save by purchasing a home in the suburbs is offset by the amount of time and money you then spend commuting. If you are likely to be traveling back and forth every day for work and leisure, you should calculate how much this is going to cost you every year. If not, your commuting costs may come as a nasty surprise once you’ve moved into your new home.