So, you're finally ready to buy a home. Congrats! Homeownership is a huge milestone. But before you start packing your boxes and planning your housewarming party, there's one important thing you need to do: figure out how much it's actually going to cost you.
Sure, you know that you'll need to come up with a down payment and pay closing costs. But there are also a number of other prepaid expenses that can come as a surprise to first-time homebuyers. In this blog post, we'll break down some of the most common prepaid expenses and help you get a better understanding of what you can expect to pay when you buy a home.
Homeowners Insurance Premium
One of the most important prepaid expenses when buying a home is your homeowners insurance premium. Homeowners insurance protects you from financial loss in the event that your home is damaged or destroyed by fire, wind, vandalism, or another covered hazard. Most lenders require borrowers to have homeowners insurance in place before they will close on a loan.
The amount you'll pay for your homeowners insurance premium will depend on a number of factors, including the value of your home, the location of your home, and the type of coverage you choose.
Specific Hazard Insurance
In addition to general homeowners insurance coverage, you may also need to purchase specific hazard insurance depending on the location of your home. For example, if you live in an area that's prone to flooding or wildfires, your lender may require you to purchase flood or wildfire insurance.
The cost of specific hazard insurance will vary depending on the type and amount of coverage you need. However, it's important to note that even if your lender doesn't require you to have specific hazard insurance, it's still a good idea to consider purchasing it. After all, it's better to be safe than sorry!
Property taxes are another common prepaid expense when buying a home—and one that can often come as a surprise to first-time buyers. Property taxes are levied by state and local governments and are used to fund public services like schools, roads, and parks.
The amount of property tax you'll pay at closing will depend on the state and county in which your home is located, the assessed value of your property, and when you purchase the property.
Mortgage Insurance Premium
If a lender requires you to take out mortgage insurance (MI), then the premium could be included in your prepaid costs. Mortgage insurance is insurance that protects the lender in the event that you default on your loan.
Mortgage insurance is typically paid monthly as a part of your mortgage payment, but you might pay a lump sum at closing in addition to the monthly payments.
Initial Escrow Deposit
In addition to the prepaid expenses mentioned above, you'll also need to make an initial escrow deposit at closing. This deposit is used to establish your escrow account, which is used to pay your property taxes and homeowners insurance premiums on your behalf each year.
There are a lot of things to factor in when you're buying a home. It's not just the list price that you need to be aware of, but also the prepaid expenses. Homeowners insurance, mortgage insurance, and property taxes can all add up. Be sure to factor in these costs when you're budgeting for your new home so that you don't end up being surprised down the road.