If you're in the market to buy a home, your down payment is probably top of mind. And rightly so — it's likely the biggest cost of homebuying. However, it is not the only cost and it's critical you understand all your expenses before diving in.
The more prepared you are for your down payment, closing and other costs, the smoother your homebuying journey will be.
Down payment and closing costs
Down payment: Depending on your credit history and other factors, you'll need to make a down payment ranging from 3% to 20% of the purchase price of your home. Take the time to learn about down payment options, private mortgage insurance (PMI) and down payment assistance programs.
Closing costs: These costs (also called settlement fees) are incurred as part of the homebuying process. These are fees charged by people representing your purchase, including your lender, real estate agent and other third parties involved in the transaction. Generally, closing costs range between 2% and 5% of your purchase price and include:
Government recording costs
Credit report fees
Lender origination fees
Tax service fees
Escrow is an arrangement in which a third party holds and then transfers money or property among different parties. You’ll come across escrow when you are buying a home and while you are paying a mortgage on your home.
Earnest money escrow: Also referred to as good-faith money, this is a sum (typically 1% to 2% of the purchase price) you put down with your offer to show the seller you’re a serious buyer. This money will be placed into an escrow account and held by a designated third party until closing, at which time you can apply it toward your down payment or closing costs.
Reserve account escrow: Many lenders require you to establish an escrow account under the terms of your mortgage at closing. This acts as a savings account to cover the annual costs for your property taxes and insurance premiums, such as homeowners insurance and private mortgage insurance (PMI). Most lenders require you to pay two-months’ worth of these reserves up front at closing. With each monthly mortgage payment, a portion of your payment will go into your escrow account and your lender will pay your taxes and insurance bills on your behalf when they are due.
Escrow payments are a good option for many homeowners because they eliminate the surprise of large annual or semi-annual payments when property taxes or insurance premiums are due.
Be sure to talk with your lender about all anticipated costs throughout your homebuying process. The more you’re familiar with fees and costs, the better off you’ll be.
Tool and Resources
Step-by-Step Mortgage Guide
Understand the mortgage process, from application to closing.
Homebuying Budget Calculator
Find out how much house works within your budget, being mindful of your expenses.
Budgeting For Your Home
These four things largely determine how much home you can afford.