Buying a home can be one of the biggest purchases you will ever make.
But first-time buyers looking to take advantage of the low-interest loans and the federal tax credit of up to $8,000 this year should consider that there are more costs beyond the purchase price of a home.
Real estate agents and mortgage brokers say one of the biggest mistakes first-time buyers can make is not budgeting adequately for their new homes.
Jonathan White, president of Blue Door Mortgage in Wellesley, said a preapproval letter from a bank or other mortgage lender will give you a guideline of exactly how much you can pay. He cautions that buyers should get this prequalification before making a legally binding offer.
"Get preapproved so you know exactly what you’re dealing with,” White said.
Scott McNeill, managing partner at East Coast Realty in Boston, said a lot of buyers receive cash gifts from family members to go toward their down payments, which sometimes lead them to underestimate the monthly cost of owning a home.
Generally, McNeill said, the mortgage payment should be about one-third of your monthly income. Having a mortgage payment in this range will leave room in for other expenses, including utilities, insurance, and homeowner’s association or condo fees â€” all big costs McNeil said first-timers should consider before they sign.
"Make sure you budget carefully,” McNeil said. "Bigger homes have bigger utility bills, and condos with larger square footage will have higher condo fees.”
Thinking about buying? Here are some costs first-time home buyers should consider:
APPRAISAL AND HOME INSPECTION
Why you need it: You don’t want to buy a money pit. If a house has flaws, damage, or general issues, you need to know before they become your problems.
What it costs: An appraisal typically costs about $350. Then you’re looking at about $400 for a home inspection.
What they are: These are the costs involved in making the purchase and sale of property. In Massachusetts, as in several other states, an attorney is required.
What they cost: Can be a few thousand dollars depending on the price of the house when you close on it . But if you’re negotiating, put the closing costs on the table for your seller to pay. Factor in about $200 for a title exam, $700 for attorney’s fees, and about $300 for deed- and mortgage-recording fees. Also allot money for title insurance â€” how much depends on the purchase price. "Most listing agents will recommend to a seller to accept an offer that pays some or all closing costs. At the end of the day, it’s really just the net sales amount that should matter to a seller, and if it helps put a deal together, then everyone should be happy,” said East Coast Realty’s Scott McNeill.
PRIVATE MORTGAGE INSURANCE
What it is: You need PMI if you buy a home with a government-subsidized mortgage or on most mortgages on which the down payment is less than 20 percent of the purchase price. With federal FHA loans, you can get away with a down payment of just 3.5 percent, but the insurance becomes necessary if you’re paying so little up front.
What it costs: It’s about $80 a month on a $200,000 loan. You can also pay it off in advance, but if you have that much cash, you should see about putting more money down to see if PMI won’t be necessary. White said that you don’t need to pay PMI after you’ve paid off 20 percent of your mortgage, but he added that you need to call to ask the lender to take it off your bill.
ONGOING FEES AND UTILITIES
What it is: For a house you have water, sewer, insurance, heat, electricity, and television/Internet service. If you buy a condo, most (or in rare cases all) of these will be included in a monthly condo fee. Normal fees can range from $150-$400 depending on your building’s amenities. And if you’re buying a condo, you should also budget a few hundred dollars per year for homeowners’ insurance. The insurance in your condo fee only covers the building, not your stuff.
What it costs: Several hundred per month.