Buying a home is one of the biggest financial commitments you’ll ever make. It can…
When you look at property listings, it may seem like the price is pretty straightforward. There’s a number with a dollar sign, and that’s what you pay off via your mortgage. Or all at once if you just won the lottery. But the costs of buying a California home go beyond a down payment, and it’s key to be prepared before you sign on the dotted line.
Your down payment is the amount you pay upfront when purchasing a home. Most mortgage lenders require a down payment somewhere between 3% and 20% of the home’s purchase price. You can put down more if you have it, but private mortgage insurance will be required if the down payment is less than 20%. Higher down payments typically lead to lower interest rates and a lower monthly payment.
Closing costs are the fees and expenses associated with buying a home and getting a mortgage, and they typically range anywhere from 3% to 5% of your loan amount, depending on the lender. They’re paid to lenders and third parties, such as appraisers, home inspectors, and title companies and usually include things taxes, fees for additional services, and loan origination fees.
To obtain a mortgage, lenders charge an appraisal fee, which is used to pay a professional appraiser who formally assesses the real value of the house. The appraisal report lets the lender know how much the house is worth so they know the loan is a sound investment. The appraisal uses comparable properties in the area to determine value. Depending on the lender, the appraisal fee may be an upfront cost or may be incurred at closing.
Homeowner’s association (HOA) fees are monthly contributions that go towards the upkeep of a neighborhood’s common areas. They cover things like community upkeep, landscaping, lighting, events, and other programs that benefit the neighborhood. On average, California homeowners pay between $100 and $700 per month, with more expensive homes, services, and amenities incurring higher fees. Hey, you get what you pay for.
Given California’s complex issues with its water table, you may have to pay additional money every month to protect and/or insure your home against potential flooding. If your house is located within a flood zone, you are required to pay flood insurance to close on the home. It may sound like an annoying reason to shill out extra money every month, but if you are hit by a flood, you’ll be glad you’ve done it.
Prepaid interest covers the amount of interest owed between the first day of accrued interest (when the loan agreement is signed) and your first mortgage payment. The best way to reduce this prepaid interest is to close as near to the end of the month as possible (but this also means that your first mortgage payment will be due sooner).
According to SmartAsset, the national property tax average is 1.07% of a home’s value, with California residents enjoying property taxes below that (0.73%). Another bonus of living in the Eureka state, right? That said, home values and cost of living vary, so look up the property tax rate where you plan on moving.
Property taxes are paid monthly to the loan servicer (as part of your escrow account), as one large annual payment, or through a tax payment plan prepaid in four quarterly installments.
Homeowners insurance helps cover the costs of damage to your property, injury on your property, or asset loss. A homeowners insurance policy includes dwelling coverage, which covers the cost of repairing or rebuilding your home due to a covered hazard (e.g. fire). Other coverages include additional structures on the property, personal liability, personal property, and loss of use (expenses incurred because of a covered loss). Talk with an insurance broker to make sure you have adequate coverage on your new home.
Private Mortgage Insurance (PMI)
Private mortgage insurance is mandatory for homebuyers who make a down payment of less than 20% of the home’s purchase price. It can be paid in different ways, such as a monthly premium or an upfront premium at closing. It protects the lender from financial loss in case the home buyer defaults on a mortgage.
When you’re buying a home, it’s important to get it inspected to make sure you know its real condition—this is something you pay for out of pocket. A sales contract may require sellers to fix specific issues before closing. According to Bankrate.com, homebuyers may pay up to $400 for a home inspection with the price mostly dependent on home size. Follow-up or specialty inspections for specific issues (e.g. water damage and mold assessment) will likely incur additional costs.
It’s easy to overlook utility costs when buying a home. Typically speaking, the larger the home, the higher the utility costs. Bigger houses cost more to heat or cool; that’s just physics. Gas, water, and electric bills can add up more than you expect, especially if home systems like air conditioners and ceiling insulation are not energy efficient. Calculate your estimated average monthly energy costs ahead of time so you’re not too surprised when those payments kick in.
There are plenty of things that can happen quickly when buying a home, but if you factor in all these from the get-go, you’ll be prepared when it’s time to close. With some careful planning, you’ll be in your dream home in no time.