Purchasing a new home is an exciting time for any buyer, and it’s easy to lose your focus on the numbers when you’ve fallen in love with a property. While you may have imagined how you’ll decorate the living room or researched the nearest Starbucks to your prospective address, chances are you haven’t been thinking about closing costs.
Would you hire professionals to spray a fresh coat of paint on your house without knowing the color? Of course not—just like you wouldn’t want to purchase a home without knowing what your budget closing costs are. It’s no secret that buying a house is an emotional decision for most, but it’s important to realize that it’s a business decision first.
The majority of business deals begin with knowing the numbers because numbers never lie.
Buying a home should be a stress-free process, and nothing is more stressful than being blindsided by additional costs that you were unprepared for. I talk with buyers all the time who have no idea there would be closing costs associated with their purchase; you can imagine their shock and dismay when they found out.
This doesn’t have to be your story as long as you know the figures and budget for these costs upfront. The housing market can change rapidly from day to day—even hour by hour—and you’ll want to be ready with your numbers so you can quickly take advantage of a good deal when it comes along.
Let’s break down these numbers into two sections: your budget and closing costs.
First: Set Your Budget
It’s vital to know your budget, and then make sure you stick to it. The excitement of moving into a new home can easily overcrowd your common sense and make you forget what you can actually afford. This is the time to analyze your budget realistically and stay within the parameters you set.
My #1 recommendation for potential home buyers? Put these numbers down on paper, instead of just keeping them in your head. This will help you visualize your finances and determine what your price range should be when shopping for properties. Consider your income and monthly household expenses and be sure to account for home-ownership costs such as utilities, maintenance, property taxes, and insurance.
In The Ultimate Home Buying Experience course, you can use the Free Budget Worksheet to help you come up with a manageable, realistic monthly amount you can allow for housing expenses. At the end of the day, knowing your monthly payment is crucial to narrow down your search parameters and focus on houses you will be able to afford—with a payment you can live with. This is called reverse mortgageineering.
MORTGAGE TIP: Just because an online lender pre-approves you for up to $500,000 DOES NOT mean you should spend $500,000. Think of your budget!
Your mortgage broker or realtor should help you with the process of determining what you can afford to spend on your home each month—and if they don’t, you probably hired the wrong person.
Second: Calculate Your Cash to Close & Closing Costs
There are two main types of costs you will need to budget for:
#1 – Your Down Payment: This is not exactly a cost, as you’ll be putting it towards the value of the house, but it will be leaving your bank account
#2 – Closing Costs: These are the fees associated with your loan and are directly correlated to the purchase price. Depending on the city or municipality where you buy, these may vary.
While your closing costs and fees can differ depending on your lender, the type of loan you choose and your location, below are the big ones you’ll definitely need to account for.
- Loan Fees – To get your loan, you’ll need to pay the bank; a loan origination fee is usually one of the largest closing costs you’ll need to budget for and is essentially how lenders make their money
- Title Costs – When you close on your house, you’ll do it at a 3rd party location where the property is officially transferred to your name. This can include a title search fee and title insurance fee
- Transfer Stamps – This fee is based on a property’s sale price and covers the transfer of real estate from one person to another
- Recording Fees – The mortgage & the deed are recorded with the county that the property is located
- Homeowners Insurance – Yes, you will want to insure your investment
- Home Inspections – You want to make sure the house you’re buying is functioning properly, and a home inspection identifies any needed repairs or problems that may need to be addressed
There may be additional, miscellaneous charges, but the above are the main fees that you’ll need to budget for. For an itemized list of closing costs, you’ll want to take our Ultimate Home Buyers Experience course to make sure you’re truly calculating the amount you can afford.
Understanding these costs will allow you to budget the right amount of money you’ll need to close on your new home. If you still have questions, feel free to reach out to me, and if not? Join me as we continue to the next lesson!