Buying a home is an overwhelming task without prior calculations. The blog post highlights the question that wanders in the mind of most home buyers, “How much money do you need to buy a home”?
How Much Money Do You Need to Buy a Home
1. Cash Down Payment
It is expressed in terms of percentage. It is a percentage that the buyers must pay before buying the home.
For example, if the home’s purchase price is $200,000 and you are needed to make a down payment of 10%, that means you have to pay $20,000.
It is a simple calculation.
How Much Down Payment are you Required to Make before Buying a Home?
It depends upon the lenders. If you do not want to pay additional private mortgage insurance, the down payment is 20%.
But sometimes, it is not feasible for first-time homebuyers; hence the lenders reduce the payments to 10% or 5%, and you may also avail of special loans for it.
It is also important to mention where your down payment funds are coming from. Conventional agencies have stringent regulations regarding your funding source.
In some cases, the payment is from your own savings bank account, and in other cases, it can come as a gift from relatives or approved agencies.
If you make 5% or 3% of the purchase price, the lender will want to know where the funds come from.
From Where you can’t Receive the Down Payments
There are two restricted sources where you can’t get down payments- cash and unsecured loans.
- By cash, we mean currency that is stored in your home.
- Unsecured loans are also a strict no-no.
If you pay the down payment from credit card advance money or by taking a personal loan, it will be rejected by the lender.
It indicates your inability to fund the down payment and creates additional debt. This is where the financial hurdles lie.
2. Pay Attention to the Closing Costs
Closing costs are the expenses due when you sign the final mortgage agreement.
It includes various costs like attorney fees, credit verification fees, and loan origination costs—the closing cost range from 2 to 5% of the purchase price.
For example, if the home cost is $ 250,000, you have to make payments of $5000 and $12,500 and add a down payment. The closing costs may vary from one state to another; it may be due to different tax regimes.
For example, the real estate transfer tax may differ, and attorney cost insurance cost differs.
3. Other Costs that you Need to Know About
Other costs that determine your cost of buying a home are prepaid expenses that need to be paid out before closing an account. An appraisal cost needs to be paid upfront.
Your lender may also ask you to pay for home inspection charges before the loan is sanctioned. If you are buying home insurance and property taxes, consider mortgage payments.
At least you should add $5000 to your cash requirements for these additional expenses.
Example- How Much Money do you Need to Buy a Home?
For example, the cost of buying the home is $ 250,000. The breakdown of the expenses is
The cost of a home: $250,000
- For the down payment, you have to make:$50,000
- Closing cost: $50,000
- Closing cost:$ 5000
- Appraisal cost- $5000
The total cash cost that you have to pay is $60,000
Some people might not use the mortgage route and wish to pay the expenses in cash. Is it wise to do so? Let’s think about it.
Related – 5 Things to Consider Before Buying a New Home
Benefits of Buying the Home in Cash
There are several benefits of buying the home in cash if it is within your pocket. You are trimming down the middleman fees and taking control of the situation by doing it.
You don’t have to make mortgage payments and interest charges.
The home-buying process includes buyers and sellers; if you pay the amount in cash, you will have more power; as a seller, it would be difficult for them to accept the offer.
Furthermore, it indicates you are financially strife, and the bank holds no equity in your home, so there is no possibility of foreclosure if money gets tight in any situation.
Disadvantages of Buying the Home in Cash
One of the biggest reasons for paying the amount in cash is that you won’t have to pay the interest rate. But the biggest drawback is that you will not get a mortgage interest deduction.
It is available as long as you take a loan. Though it doesn’t reduce your interest rate, it is beneficial when filing a tax return.
No matter how much amount you have in your bank account, the purchase may take a significant role in your savings accounts, and you will lose liquidity in case of a financial emergency.
Bottom Line
Before buying the home, you should plan for different costs like your monthly finances, down payments, closing costs, origination fees, and much more and then take the decision.
Thinking about the cost will help you to decide whether buying a home is feasible for you or not and will give you an idea about how much money you really need to buy a home.
